Abraham Lincoln is credited with using the phrase “Actions speak louder than words”. We all know that it’s easier to say something than it is to follow through. Some might say that the true measure of the person is one’s doing what they say. So the phrase “Actions speak louder than words” is as true today as it was in 1856, or is it?
Could it be that, in today’s 24-hour news cycle, words are more important than actions? President Trump moves markets with tweets, executive orders and international relations decisions—or missteps, depending on where you fall on the political spectrum. The stocks of entire sectors move up or down based on the President’s message of the moment. In general, stock markets have reacted very favorably to his promises of reform and infrastructure-spending. Given the time, energy, and “political capital” it will take to get these items through Congress, however, it seems that “words” are speaking louder than actions. As usual, expectations are driving markets. The important thing for today’s market is that words are followed up with actions.
At the same time, markets have largely ignored news reports that would otherwise leave a stain on the President. Questions about his conflicts of interest, his connections with Russia, his trade policies, his disorganized administration, his executive orders have all seemed to be downplayed. It seems that investors are listening to what President Trump wants them to hear, and they are disregarding the rest. If 2016 was the year of uncertainty, then 2017 must be the year of double, secret uncertainty.
At least for now, equity markets don’t seem to care about criticism of President Trump. January experienced the Dow closing above 20,000 for the first time in history. Is it all based simply on “words”? We don’t think so. 4th quarter reported earnings for companies was strong, confirming the earnings recovery that began before the election last year. The unemployment rate continues to stay low, even as more people return to the job market. Wage growth seems to be in check. And the Fed’s preferred measure of inflation is still below its target. While the Fed intends to raise interest rates several times this year, Chair Yellen emphasizes her intent to move only to the extent the economy can handle it. Global growth, especially in Europe, is better than expected and continues to surprise on the upside. While there are other things than “words” supporting the stock market, earning could improve further if some of the talked-about reforms are passed.
For our part, we are acting upon our signals and maintaining our clients’ asset allocations. Our volatility strategy is currently in cash, so those clients with exposure to our volatility strategy have, for now, an extra cash cushion, in case “words” disappoint.
It’s probably true for all of us that we prefer to depend on someone’s actions more than on someone’s word. But markets move ahead of actions...they try to anticipate the future. The trick is to know which direction the future is going…which “words” become real actions. Mark Twain may have said it best when he summed it up this way, “Actions may speak louder than words, but not nearly as often.” At least for now words trump action.