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The Markets This Week

September 4, 2018 | Weekly Commentary

by Connor Darrell, Head of Investments
Trading activity was expectedly below average last week, as many investors were more likely focusing on the upcoming holiday weekend than on the limited new developments in global markets. With Q2 earnings season finally winding down, trade policy once again took back the spotlight. Stocks reacted positively to improving relations between the U.S. and Mexico, but some of the positive momentum was lost on Friday when it became clear that Canada was not ready to take part in any new trade agreements.

The S&P 500 managed to climb about 1% on the week, with international markets positive as well. The bond market was largely flat.

A Note on “Short-Termism”
There is an argument gaining traction that investors are too “short-term” focused, which leads to inefficient decision making at the executive level in response to shareholder demands that do not align with a long-term view of value creation. This argument is the essence of why Elon Musk made headlines earlier this month, claiming he desired to take the company private to avoid the incessant demands heavy scrutiny of public shareholders. It is also the core of a new bill being proposed in Washington aimed at taking power from shareholders and giving it to employees and the government.

Ironically, Tesla itself is a perfect example of shareholders not falling into the trap of “short-termism.” Tesla currently reports losses on its income statements on a regular basis due to its heavy investment in new technologies. In other words, Tesla doesn’t actually make any money because it invests all of its revenues back into research and development. However, the market values Tesla at about $13 billion dollars, more than it does Ford and about equal to General Motors, both of which have a much larger foothold on the automobile marketplace and are considerably more profitable. The reason that markets value Tesla so highly is precisely because there is an expectation that down the road, Tesla will be more profitable than both Ford and GM. Shareholders and the investment community at large do a tremendous job of taking a long-term view, and serve a pivotal role in keeping corporate decision makers accountable for properly running their respective businesses.

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