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VOL. 133 | NO. 47 | Tuesday, March 6, 2018

Waddell: Investment Gains Don’t Last Forever

By Andy Meek

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David Waddell was upbeat during the 2017 version of the yearly “State of the Union” presentation he gives to clients of Waddell & Associates, but this year, not so much.

It’s not that things have changed for the worse, as he sees it. More of a natural turn from what he calls the cautionary phase to the confidence phase to the enthusiasm phase of the economy – something he thinks we’re now in the later stage of.

Which means that for this year’s presentation, there was nothing comparable to the accompanying slides at last year’s that included a suited man tearing away his clothes like Clark Kent to reveal a financial Man of Steel. Then, Waddell’s themes were “winning” and “economic growth.”

David Waddell

Today, more than a year into the Trump economy?

“2017 was literally, like, the best year ever from a risk-return perspective across the markets, all over the world,” Waddell told The Daily News. “We’ve been at this now for almost 10 years, since the great financial crisis of 2008. This is now the second-longest economic expansion and the second-strongest bull market in history. We’ve had some setbacks. We’ve had benign inflation, decent economic expansion and really robust investor returns. But this isn’t going to last forever.”

He’s not the only one warning that good times don’t last forever. The team at Memphis-based Summit Asset Management has been making a similar point lately in its communication with clients.

A letter the firm sent out to client toward the end of January warned that, “everything is pointing in the right direction” at the moment, which leaves the firm with a few concerns.

First, the firm points to the recently enacted tax legislation. It’s questionable, Summit notes, how much benefit will materialize from the legislation when the economy is already running close to potential and at full employment.

“History suggests the result will be a larger than expected pick-up in inflation. This could encourage the Federal Reserve to accelerate their planned interest rate increases.”

The tax bill, the firm continues, also will likely result in higher federal budget deficits. Meanwhile, the client letter also notes that valuation levels of global stocks are high relative to history.

“At some point, there will be a correction,” the Summit team writes. “We are overdue for one. As we have written many times, corrections are both normal and healthy. We also know that significant corrections rarely occur without a recession, and there is no data suggesting a recession is imminent. So, enjoy the good times, but be mindful of the environment and what is already priced in.”

Waddell says much of the Trump agenda has already been realized, which suggests the midterm elections this year won’t necessarily be as consequential as the conventional wisdom might suggest. That Trump agenda has included enacting the tax cuts, a boost of spending on defense, “defanging” Obamacare and pursuing deregulation.

Here’s what Waddell says ordinary investors and small business owners can take away from all this:

“If you have a business right now, sell it. There’s $1 trillion right now in dry powder in private equity. This is the greatest sellers’ market in private equity we’ve seen in a long time, if not ever. Even among our clients, the valuations they’re receiving on their businesses are astounding.

“I want to prepare people that it’s been a decade, and most people have gotten pretty complacent about it. If clients have illiquid assets and they don’t want to own them within the next three years, then sell them now. Take advantage of all the cash hunting for targets. I think the stock market has further to run, but we’re getting closer to running out of runway after a near decade of advances.”

MORTGAGES 0 49 10,665
BUILDING PERMITS 336 548 21,505
BANKRUPTCIES 256 256 6,219