John E. Chapman Chief Executive OfficerDear Clients and Friends,
I came away from last week more convinced of the need for investment discipline, not less confident in the opportunity ahead. An election can change the policy outlook quickly. It takes more than an election, however, to change the underlying direction of an economy, the earning power of a good business, or the purpose of a thoughtfully constructed portfolio.
That distinction is especially important now. My reading of the midterms results is that some investment assumptions will adjust over time, but the broader case for remaining invested has not been overturned. Friday’s employment report strengthened that conviction. As we look toward 2027, I see an environment that calls for selectivity and patience, not retreat.
What Has Changed
The election will put a Democratic Congress alongside a Republican White House. In October, I made the point that a congressional sweep is not a governing trifecta. That remains the right starting point. Going forward, I expect a more contested policy process, with less room for sweeping legislation and more attention to negotiations, oversight, and the implementation of existing authority.
For investors, that is neither uniformly good nor uniformly bad. A narrower path for major policy changes can create a more stable environment and certain business decisions become easier to make. Still, difficult budget and government funding negotiations can create alarming headlines and market disruption. This will be especially true when the current government funding resolution expires on December 11th and again when the United States reaches its statutory borrowing limit in 2027. At that time Congress must take up the issue of raising the country’s debt ceiling.
While these are examples of the meaningful challenges we face, the mistake would be to translate an election result directly into a verdict on the entire market. The effects will differ over time and across industries and businesses. Our analysis needs to be equally specific.
Another development coming out of last week’s election result pertains to artificial intelligence. Incoming governors in Texas and Georgia campaigned in part on moratoria on data center development, adding potential policy restrictions to the industry’s expansion plans. Importantly, these are not enacted restrictions, nor are they a single nationwide prohibition. However, they bring an issue we have discussed throughout the year into sharper focus: the distance between announcing an investment and earning a return on it.
A delayed project can still have economic value, but its financing costs, customer commitments and expected returns may look different when the timetable changes. That matters most where the investment case leaves little room for delay. My focus is on distinguishing businesses with the financial strength to adapt from those whose plans depend on everything arriving on schedule. In 2027, I expect these details will matter considerably more.
What Has Not Changed
Friday’s employment report offered an important counterweight to the political discussion. Employers added 165,000 jobs in October, unemployment stood at 4.1%, and the government revised employment gains for both August and September higher. The revisions are particularly meaningful to me. They suggest that the economy entered the election on a firmer footing than the earlier employment reports had led us to believe.
Those jobs were created before the votes were counted. The report therefore tells us something about the economy we already had, not the economy a new Congress might eventually help shape. I read it as evidence that the expansion has more underlying support than a nervous market can sometimes convey.
This said, a stronger labor market can also reduce the urgency for lower interest rates. The Fed’s October statement described strong economic activity alongside still elevated inflation. That combination is why I described the Fed’s decision as a pause, not a pivot, in our November Private Client Letter. Friday’s report gives me no reason to modify that view.
For long-term investors, I would rather have an economy that can support earnings than one that requires emergency rate cuts to stimulate activity. The adjustment is in what we should be willing to pay for those earnings. A sound business can remain a sound business even when investors become less generous about its valuation. Recognizing that important difference helps us avoid confusing a challenging market with a broken economy.
None of this means inflation has been resolved or that every household is prospering. It means the investment outlook should be judged against the full body of evidence. My central expectation remains continued expansion into 2027, with returns increasingly earned through profits, cash flow and income rather than simply through rising valuations. The path forward may become more volatile; however, it remains promising.
Why I Remain Constructive
We see the coming year as an opportunity for our broader investment approach to further demonstrate its value. The next phase of AI may reward businesses that use the technology well, not only those that build its infrastructure. A company that improves productivity, controls costs and serves its customers more effectively can create value without being the subject of the market’s most popular investment narrative.
It also explains our confidence in the design of our strategies. We do not want the favorable outcomes we are striving for to depend on one industry maintaining its leadership, one interest rate forecast proving correct, or one political outcome delivering everything investors hoped for. Our emphasis begins with the individual family’s plan. We then align quality, diversification, and valuation to preserve participation in growth while limiting dependence on any single source of it.
Quality, in this setting, is not simply a defensive characteristic. A business with dependable cash flow and a strong balance sheet has choices: it can fund investment, withstand delays and take advantage of opportunities when less resilient competitors cannot. I believe that flexibility will be valuable in a year when the cost of capital and the return on capital receive closer scrutiny.
As we move into the new year, I will be watching employment, inflation, energy costs, and the conversion of business investment into earnings. Sustained deterioration would change my assessment; improving productivity and broader profit growth would reinforce it.
Lastly, I remind investors to keep a safe distance between their politics and their finances. We must not allow personal enthusiasm or disappointment in a political outcome to shape our investment strategies. I believe the right response following an election cycle is to stay engaged, stay selective, and keep the plan in view. The midterms may have changed the policy path. They have not changed the value of owning productive assets, receiving income, or giving disciplined strategy time to succeed. That is the foundation of our confidence as we look toward 2027.
As always, thank you for your confidence. Please reach out if you would like to discuss how recent market movements affect your individual portfolio, income needs, or investment strategy.
20261110-1
