If you are watching the news on a regular basis, you are being fed a steady diet of all things political. We have found ourselves at a never-ending media buffet with all flavors of concern such as healthcare, Russia, tax reform, immigration, debt ceiling, political firings, Korea, internal investigations, political appointments and on and on and on. We can’t swear to it, but we believe a few of these items are gluten-free.
Many of our clients are asking what negative impact Washington is having on the markets. Just how much attention is Wall Street paying to the political uncertainty? We believe that markets are paying about as much attention to politics as your teenage son or daughter pays to the advice you so lovingly provide. That is to say, not much. By and large, the markets are ignoring all shapes and sizes of political news, both the “minor inconvenience” and the “catastrophic calamity”. We believe instead that markets are being driven by two things, corporate earnings and global growth.
It is very easy to get caught up in the emotion, hype, and “stress eat”, if you will, and ignore the financial information right in front of you. So, let’s take a break from the politics and look at some key factors that are contributing to the strong earnings and global growth picture.
A recent Fidelity Investments economic update noted the following as having contributed to growth seen in both US and international stock markets: a synchronized global expansion, low inflation, extremely low market volatility and a weaker US dollar. Despite what one might fear when listening to the news, global trade is at its highest level since 2011 and nearly 90% of countries are reporting higher export orders than a year ago. European economies are experiencing growth as political risk eases, China’s economy is steady, and the US economy benefits from this global improvement. The weaker US dollar has also contributed to corporate earnings growth for many global companies.
On the home front, even after the Federal Reserve has raised short-term interest rates two times this year, long-term interest rates are lower now than where they began the year. Both US stocks and bonds have performed well, apart from energy and telecom. Strong corporate earnings and low inflation are providing a stable backdrop for the Fed to seriously discuss the unwinding of their balance sheet. If you remember back to the financial crisis, “The balance sheets of the four-major advanced-economy central banks—the U.S. Federal Reserve (Fed), European Central Bank, Bank of Japan, and Bank of England—have more than quadrupled since the global financial crisis due to trillions of dollars of quantitative-easing asset purchases.” That was then—central banks rapidly buying bonds. This is now—central banks slowly getting rid of bonds. This “unwinding” will effectively tighten monetary policy, or take money out of the system. We will have to pay close attention as this move by the Fed could increase market volatility.
So, despite the steady diet of political media reporting, it appears that financial markets are more focused on how companies and countries alike are showing continued growth. With a low volatility environment, inflation in check and global demand at relatively high levels, we believe our clients are being rewarded for maintaining their current portfolio allocations.
We realize that emotions do play a large part in one’s outlook and that it is easy to forget the basics while focusing on the sensational. Washington will eventually get its act together. In the meantime, earnings and global growth can be the two main ingredients that merit our attention, and the rest can be left to the politics of the day.