Politics vs The Economy – One is More Important Than the Other
Oh, man. Last week sure set off a political firestorm…
And the markets! JEEZZZZ, did you see what they did?
The S&P 500 sold off to the tune of a whopping -0.35%. (P.S. Insert sarcasm here.)
(Double P.S… As of this writing at 12:45 on Monday, May 15th, 2017 the S&P 500 is up +0.45%.)
From an investment viewpoint, fears started Tuesday evening that Trump’s decision would roil markets on Wednesday. While the politicos and the press salivated, investors reacted with one big eye roll.
As for the politics, I’m going to stay away from whether his dismissal was justified. If you are looking for that discussion, I’m pretty sure one quick login to your Facebook account will quench your thirst there. I’ll only say that I’m betting it may take time before the facts bring us to a fair conclusion. That is if a fair conclusion is indeed even possible these days.
How the market digests any new admissions in the days and weeks ahead is anyone’s guess. As I’ve said “countless” (hat tip Sarah Huckabee Sanders) times, no one can accurately and consistently predict short-term market moves.
For now, my opinion is that the market sees this as political noise and not really a serious economic event. It’s sort of like Syria, North Korea, or the recent French election…or the March failure by the House to pass health care reform…or its subsequent success in May.
The fact is that these events did little to rattle, or help, stocks.
Let me be clear – it’s not that what happens outside the world of Wall Street isn’t important…it is. However, the reality is that these events simply haven’t had an impact.
The real question that rises from these political ashes is, “How will this impact future work and reform?” For example, what about tax and health care reform? Will a much-coveted cut in the corporate tax rate fall victim to political infighting and impede the rally?
While stocks soared last November amid expectations of business-friendly tax reform, more recently, a strong first quarter earnings season, upbeat forecasts, and stronger global growth have really picked up the slack.
Speaking of earnings, what would my blog be without a Bespoke chart, right? Earnings season ends next week with the Walmart report. (Alcoa is the unofficial start, Walmart is the unofficial end.) With over 2,300 companies having reported, you can see the top chart showing earnings and the bottom chart showing revenue. While my blog from May 2nd had the percentage of companies beating earnings estimates at 68.1% and revenue estimates at 66%, the current readings are still impressive. Especially revenue beats, since revenue cannot be impacted by fancy accounting.
The bottom line is this – In the short term, we can get volatility. In the longer term, stocks have historically taken their marching orders from the economic fundamentals and profits.
I know that’s not a riveting conclusion, but it’s elegant in its simplicity…according to the author.
Please call with questions.
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David B. Armstrong, CFA
President & Co-Founder
Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....
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