Streak Absent Volatility Ends Abruptly on Latest Storm for Trump – Week Ended 5/19/17

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.

Posted in Blog Post.