Investors witnessed the sharpest one-day decline since the Election last week, declining -1.8% on Wednesday as headlines broke that President Trump may have tried to suppress the FBI investigation into his administration involvement with Russia. As news of that latest twist in the ongoing saga between the new administration, the FBI, and what appears to be a very serious war by the press and government insiders (leakers) against the new President, the word impeach became front and center conversation and doubts growing that Trump will still be President of the United States in 2018. Financial markets are rarely helped by uncertainty, and it goes without saying that these latest developments increase anxiety while also appearing at first glance to reduce the odds that the pro-growth political agenda credited with at least a portion of the market rise over the last 6 months will come to fruition. Yet, to the surprise of probably many, US equities managed to largely reverse the acute one-day damage and conclude the week down just -0.38% from where it began.

Why the sudden positive reversal by the markets on Thursday despite the ongoing uncertainty surrounding the President? From our perspective: Economic Fundamentals. A look back at the two modern-day parallels of such Presidential uncertainty in both Nixon and Clinton (impeachment hearings) impeachment eras reveals that the market continued to be driven by economic underpinnings and were little affected by the political noise of the day. Logically, this makes sense because the questions any investor should ask themselves when weighing new developments of any sort is, how does this news affect the real economy? Will it impair the current operating thesis that growth will continue? Specific to this political storm, is this latest controversy going to affect how consumers spend (will they be less likely to purchase a new car, home, or even curtail their consumption of new clothing, electronics, food, or vacations)? Probably not from our perspective. Secondly, does the political circus reduce the likelihood of pro-growth policies materializing from what were previously expected? This second question is more debatable, but one could highlight that expectations of Trump being successful were steadily declining since inauguration to now sit at a level where many believe we are back to Washington dysfunction as usual. A contrarian might ponder, with expectations so low the possibility for positive surprise and appetite by the legislative branch of our government to move forward on tax reform and infrastructure investment despite Presidential controversy is only amplified.

Where does this leave us? From an economic perspective, the US and global economies continue to enjoy an improving backdrop. Just concluded was an extraordinarily strong 1Q earnings season when comparing it to a year ago. We also continue to receive data showing a pickup in home demand, low unemployment, rising consumer net worth, and lots of money still looking for a more productive place to land. Credit conditions also remain accommodative for corporate finance as evidenced by low credit spreads while European economic data continues to show improvement abroad. From where we sit, political turmoil and worries usually tend to be noise and most influence the short-run. The real focus for investors must remain the fundamentals and on that score the economy and by extension the financial markets, still seem to have some fuel left in the tank. At the very least however, 2017 looks like it just got a lot more interesting as the soap opera that currently describes this Presidency just became a lot more intense.

Domestic equities continued their quiet walk during the 2nd full week of May, experiencing the smallest average intra-day trading range of the year and among the lowest in history. Some undoubtedly find the calm mood peculiar; there remain more than ample worries to fill the room; the sudden firing of the US FBI director, ongoing geopolitical tension, and renewed news of Chinese economic turbulence are top of mind. But historically, periods of quiet volatility are accompanied by above average market returns. The broad market as measured by the S&P500 did slide -0.3% for the week but remains roughly flat here in the month of May. On that score, the sentiment among some financial media that investors are perhaps too stupid to realize the Trump administration has delivered none of its promises on the economy, may appear correct at first glance. But what is lost in that simplification or attribution for performance is reality of a dramatic improvement in corporate earnings following what was a 4 quarter contraction beginning 4Q2015. Said differently, while a Trump Bump was probably responsible for the market advance in the aftermath of the election in November and through early Spring, fundamentals are improving if for no other reason than some easy year-over-year comparisons and those are what should be credited with ongoing market stability.

As alluded to above, corporate earnings are the key force supporting the financial markets at this point (as they theoretically should be throughout any cycle). With over 90% of the companies in the S&P500 now reported for 1Q, nearly 3-in-4 beat street expectations by at least 1% and the aggregate level of growth now stands at +14% over last year. That is a big and broad-based improvement! Aside from corporate earnings, economic data around the world was also favorable as global leading economic indicators continue their hook higher; soft measures including surveys on activity and sentiment are improving; employment remains strong and unemployment is now toeing all-time low levels; and data in Europe remains quite favorable following nearly a decade of stagnant growth and political discord; all while reported inflation is not problematic. There were also news reports that the housing market is heating up with new households opting to purchase vs. rent for the first time in many, many years. Housing is important because the construction and occupancy of new homes has significant favorable trickle-down effects for broad swaths of the US economy including both manufacturing and money velocity.

So despite what is now a virtually uninterrupted climb for the financial markets since the election and even last summer, the path of least resistance seems to be higher. We are not deaf to the argument however that a more noticeable pullback or correction is overdue. Still, any such retreat would tend to be viewed by us as an opportunity to rebalance or more confidently deploy capital into quality businesses given that the US economy has never entered a recession when corporate earnings were on the rise as they are now. This economic cycle is mature, but the fundamentals across the US and developing in Europe suggest a market that is at little risk in the near-term of falling apart.

US equities continued their move higher for a second week, resulting in another month of gains for domestic equities. But the real story during April was the strong performance turned in by international markets. While domestic equities as measured by the S&P500 climbed roughly +1% when including dividends in April, the MSCI EAFE more than doubled domestic performance with its advance of +2.5%, mostly occurring following the first round of the French election process with a result that suggests populist anti-establishment movements that pose great uncertainty to the global financial (same forces that are credited with driving Brexit and election of Trump in 2016) norms may be losing momentum. Also encouraging during the second half of April was a return of outperformance to the more economically sensitive areas of the equity markets including financials, smaller-size companies, and industrials.

From a fundamentals perspective, the final week of April was generally positive. Perhaps most noteworthy was the strong performance being turned in by corporate America for the now complete 1Q reporting season. More than 200 of the S&P500 constituents reported quarterly earnings last week, and are looking set to beat not only earnings, but also revenues. When looking at earnings, it is appearing likely that aggregate index earnings will be up roughly +13% over the same period last year! While one considers that the year-ago levels make for some easy favorable comparisons, the nominal improvement remains quite noteworthy and is overshadowing the weak real (after-inflation) GDP growth being reported for 1Q17. The US economy has never (yes, never is a powerful word) entered a recession when corporate earnings were rising, let alone so strongly. For the economy as a whole, US data also continues to provide support to those subscribing to the view that the economy remains in a strengthening trajectory. US bank lending is shown to be increasing over recent weeks; Iron ore prices (a key input to industrial production) are again rising; and wages are accelerating as is household formation and the homeownership rate. Abroad, European earnings for 1 are on pace to advance +24% over year-ago-levels even as central bankers around the globe remain accommodative with inflation data remaining benign. All of this suggests that economic activity will again repeat its recent-years pattern of a marked slowdown during 1Q and rebound in the Spring.

With the first four months of 2017 being so decisively strong for investors, the phrase advocating to sell in May and stay away naturally creates anxiety for investors and even perhaps the impulse to temporarily abandon long-term objectives. We too believe that it feels like the market is due for a more meaningful pullback than anything witnessed in the last 6 months. Yet while we are now entering what is often a more seasonally challenging month for long investors, the sell-in-May crowd (whos most avid subscribers advocate not buying back in until after September) would have experienced very mixed-success and disappointment in recent years. Further, out today from a technical team at research firm Strategas Research Partners is a chart showing that when the broad indexes are in an upward sloping trend, performance in these stereo-typically softer coming months continues to skew positive. We remain of the perspective that trying to time pullbacks reduces investing success to that of luck; and while we may see a decline as we enter what is often regarded as the dog days of summer, such a move would be viewed as a buying opportunity rather than the start of a material change in trend.