Stocks were mixed yesterday, a relatively light day for earnings.

The bond market has stayed within a relatively tight range all week while the dollar has inched higher. 

The big political news comes from Venezuela where the U.S. and other countries are backing the head of the country’s legislature, Juan Guaido, as its new head of state given the allegedly fraudulent reelection of Nicolas Maduro.  But Maduro still controls the military and has no intention of stepping down.  Why this matters to us economically is that Venezuela is still a reasonably sized producer of crude oil.  Moreover, the crude it produces, gunky and heavy, is precisely what about 5 Gulf Coast refineries need to make diesel and jet fuel.  

There is more to the tale than that.  While Venezuela ships heavy crude to our refineries, we ship naphtha to them which is used to cut the viscosity of their oil so that it can be processed and shipped.  Several years ago, as Venezuela was spiraling into despair, Russia, through a state controlled oil company invested money in Venezuela and now owns about half of its national oil company.  Should the U.S. impose sanctions on Venezuela, certainly quite possible, it would set off a worldwide chain reaction creating some degree of turmoil. Venezuelan oil production has fallen so far, that additional declines wouldn’t necessarily be that meaningful.  But the impact on specific fuels in specific markets, like diesel and jet fuel in this hemisphere, would be meaningful.   It would also impact Russia.  Given our government’s love/hate relation with the Russians, that raises further questions.  So far, this isn’t all that meaningful but it bears watching.  It certainly beats talking about the government shutdown. 

The World Economic Forum is now ending in Davos, Switzerland. This conclave brings together world business, political and academic leaders every January.   This year, they walked in bearing a collective sour and apprehensive mood.   The weak stock market, volatile currency markets, slowdown in China, and decelerating economic growth worldwide had many participants issuing dire warnings looking forward even knowing that the most recent economic data was pretty good.   Last year, everyone came to Davos brimming with optimism. Quite often, it appears to be a contrary indicator.   Morgan Stanley CEO, James Gorman probably stated it best when he likened Davos to an echo chamber where everyone’s concerns and warnings bounced off the proverbial walls into the minds of each participant.  It was hard to stay optimistic with all the fears in place.

Of course, there are always concerns.  This year’s range from tariffs to China, to the long term impact (if any) of the U.S. government shutdown to the rise of populism.   But if one could summarize what is changing moods, I would focus on two words, bifurcation and empathy.   In the U.S. we see the bifurcation full blast in the current battle between Donald Trump and Nancy Pelosi over the wall.  Neither is giving an inch.  Neither is willing to listen to the other side.  Neither seemingly cares much about the impact on millions of lives.  And for what?  A couple of hundred miles of wall isn’t going to make a difference.  It won’t stop drug flow and it won’t stop bad guys from coming into the country.  $5.7 billion, the cost of the wall additions, is a pittance compared to the costs to many who have to work (or aren’t allowed to work) without getting paid.  

It isn’t just the shutdown, which will end in due course with all the government workers getting paid anyway.  It is almost like the center disappearing and everyone moving left or right.  It isn’t just here.  Former fringe elements are becoming real political forces in Italy, Germany, France and Spain. The U.K. is being torn by how to separate itself from the rest of the Continent.  In South America, countries lurch from extreme left to extreme right with no pathway yet to success.  France went from a near Socialist to a pragmatic businessman and now we have yellow-vested protestors on the streets.

This is all a result of income inequality.  The halves are flourishing, generally in control, and don’t see what the problem is. The half-nots are frustrated and lashing out.  We see it in areas other than income.  Me Too, and Black Lives Matter are further evidence.   So far, the world doesn’t seem to be able to find a middle ground.  There may not be any for a while.  The mood is sour.

Bifurcation, this widening of divides, is the first word.  The second is empathy.  No one showed the lack of empathy more in the last 24 hours than Commerce Secretary Wilbur Ross who said yesterday that he didn’t understand the plight of unpaid Federal workers. They could all go to a bank and get loans against future pay checks.  Even if that were 100% true, it is the type of totally uncompassionate statement that we have had to endure (from all sides!) over the past few years.

As a result, investors are tired, frustrated and worried.   On the other hand, consumers, at least in the U.S. are working, feel secure in their jobs and spending freely.  We just completed the best Christmas season in years. Restaurants are busy.   Apparel is hot again.  What isn’t hot is investment.  It isn’t just businesses that are apprehensive, partly due to the mood, partly due to policy uncertainties, and partly due to fears of slower growth.   It is individuals.  Big ticket items like houses and cars aren’t big sellers.   Millennials want to rent as long as they can whereas Boomers wanted to buy as soon as they could afford to.  City dwellers would rather Uber than own a car.  Some of this may be uncertainty and mood.  Some may be the burden of student loans.  Whichever doesn’t matter.

So what do we do as investors?  As I have said many times, investors buy earnings and interest rates. They don’t buy moods, politics and bifurcation.   Stocks are holding up pretty well against an onslaught of pretty lousy headline news.  As noted previously, a lot of clouds will likely dissipate within the next 60 days or so.  Brexit will come to pass one way or another by springtime.  The tariff issues with China will be clarified for better or worse.  The government will reopen.  The Fed will stay largely in the background.  One rate increase of not this year isn’t going to be an economic game breaker.   Markets could retest their December lows but a full retest to below 2400 isn’t likely.  Investors aren’t as overleveraged today, this isn’t the time of year anymore for hedge fund liquidations, and earnings are still pretty good.  Valuations are fair.  Could markets slide 5% or so?  Of course!  But that would only create buying opportunities.

Stocks today are neither cheap nor expensive in the aggregate but there are plenty of bargains.   Look carefully, be disciplined about prices, don’t chase, and you will find them.  Don’t let the political mood sour your investment focus. But stay aware should changes have economic consequences.

Today, Alicia Keys is 37.

James M. Meyer, CFA 610-260-2220

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