Disproportionate wealth generation

Stock market continues the second longest bull runs on record

Watching a busker swallow a sword offers similar emotions to watching the stock markets meteoric rise. You want to turn away, but you can’t stop watching in anticipation of a successful maneuver or inevitable impalement.

The stock market continues the second longest bull runs on record as the Dow Jones Industrial Average peaked above 25,000 this week. The connotation is that the economy is doing exceptionally well, companies are profitable and society has lots of discretionary spending funds. (Both the TSX and S&P indices are also peaking at all-time highs).

However, if you scratch the surface of this narrative there is a more interesting story. Certainly, U.S. business enthusiasm is strong and general fundamentals are very positive. Companies lived through two Democratic terms of government and are responding well to a pro-business Republican agenda.

Examining the weighting of the Standard & Poor’s index four of the top five companies are technology (six of the top 10). Apple is the greatest at more than double the weighting of the first non-technology company, Berkshire Hathaway - Warren Buffets famous firm.

In the U.S., job growth is strong and corporate profits are healthy. Interest rates are low and taxes are declining. The economy is like a fire and the stronger it burns; more fuel is applied and the fire burns brighter. There is a lot of heat being generated but how long can it burn this bright, most pundits think it has a long way to go.

The euphoria is contagious, sentiment is the market has lots of legs to run and the Dow could hit 28,000 - 29,000 this year. The logic in this statement is due to broad economic participation through stock rotation as other sectors are starting to show growth, not just technology. Consensus remains growth, but sometimes being a contrarian is a pragmatic position. Take your gains and wait for a pullback.

Warren Buffet remains a validated optimist. He feels years of economic growth lie ahead. Few would be bold enough to challenge his position on market matters. He also feels wealth is being concentrated and not evenly distributed. “A rich family takes care of all its children, not just those with talents valued by the marketplace”. This opens other conversations.

How can a strong market affect PEI. It certainly creates great market opportunity for local exporters and ultimately the lagged benefits reach our shores. The immediate opportunity is in divesture, selling a company into the strong market.

The result of growth is investment and consolidation. As companies float or cash-flows grow they need to deploy that capital in search of more growth. Buying related enterprises is a logical use of capital. It may be unreasonable for Island firms to position for sale to public companies, but the model pushes back through the supply chain. There will be acquisitions – there are presently acquisitions occurring.

A number of years ago I was involved in a divesture to a public company. I would argue that this should be a goal of any company. Eventually every entrepreneur needs an exit and when the market is hot it’s a great time to sell.

Are our local firms, professional advisors or entrepreneurs positioned to take advantage of this wave? This is where provincial governments and strategists need to be concentrating. Access to growth capital, wealth creation and “a next wave” of economic expansion post divestiture. Our public policy need to position for this next cycle of renewal.