Change is the Constant
By Chris Lafayette, CFA
ON THE SURFACE, 2025 seems to have the potential to bring greater change than usual, particularly as we look to a new administration in the White House, one with control of both the House and the Senate. The incoming president will also inherit a US stock market which has rebounded strongly since the recessionary fears of 2022, and present valuations may require positive developments to keep the stock market afloat. As the pendulum in Washington inevitably swings from red to blue and back again, the investment approach at Trust Company of Vermont is, for the most part, unaffected by these shifts. This stability stems from two key factors: the way in which stocks are inherently valued, and the specific approach we utilize in selecting individual stocks and bonds.
Though numerous factors influence stock prices in the short term, over the long term, there is a strong correlation between a stock’s price and its level of profitability. Warren Buffet demystified the nature of stock price movement when he described the intrinsic value of a company as “the present value of all future cash flows, discounted back to the present day.” Crucially, the phrase “all future cash flows” refers to a time horizon that stretches far beyond the term of any sitting president. Changes in policy or regulation today are unlikely to impact a company’s cash flow beyond the next four years. Thus, even if this administration has an impact on a stock’s current cash flows, the vast majority of a company’s intrinsic value remains constant over this relatively short timeframe.
The second reason for our resilience to political shifts is our emphasis on “quality” companies when constructing diversified portfolios. Some businesses may rely on government subsidies to turn a profit, and when those subsidies are withdrawn, the business can crumble. However, the “wide moat” of a quality business, one which creates a durable competitive advantage, has often been established over many market environments and regulatory regimes. These businesses also have balance sheets that allow them to withstand major disruptions, whether recession, inflation, war, or any number of unexpected challenges.
Of course, there is also the fact that campaign promises are like New Year’s resolutions: many are left unfulfilled. As we assess the agendas of proposed cabinet appointees, we are cognizant of the varied interest groups that have a tendency to pull back on the most radical elements of change.
Four years can seem like a long time, but in the realm of stocks, economies, and nation states, it’s fairly short. Changes are certain to occur, yet their magnitude and extent is very much up in the air. The changes that do occur, will allow us to evaluate the ramifications of different approaches and philosophies. Then, in less than two years, Americans will be back at the ballot box with another chance to enact change during the mid-term elections. In the meantime, we will remain vigilant in assessing the risks and opportunities that arise in what is, and always will be, an ever-changing world.