Clear Skies or Eye of the Storm
Irma – Eye of the Storm
By David Nelson, CFA
Investors have been forced to accept sloppy performance from U.S. equities over the last few weeks. While positive on a trailing 1 month basis rallies have given way to quick pullbacks as momentum fades. We’ve had no shortage of bad news as investors cope with everything from a thermonuclear detonation in North Korea, Charlottesville, a White House shakeup and two devastating hurricanes. Add the fact that bond yields are cratering and other safe haven assets like gold are breaking out, it’s clear many are hiding in the bunker waiting for clearer skies.
Dysfunction in Washington is nothing new in a world of I WIN YOU LOSE politics. However, at least for a moment bipartisanship took center stage last week as the President frustrated with his own party turned to Democrats, in particular minority leaders Nancy Pelosi and Chuck Schumer. After accepting their deal to raise the debt limit for three months tying it to aid for Hurricane Harvey, Republicans were forced to take a step back and regroup. It was particularly telling given the fact that House Speaker Ryan had said the offer was unacceptable just hours earlier.
Senate Minority Leader Chuck Schumer with the President
Hardly a Kumbaya moment but at least for a day partisanship gave way to compromise, something that’s been lacking over the last decade.
We’ve come through 2 excellent quarters with strong earnings and revenue growth but it seems investors need something more on their plate before entering or adding to current positions. Given the fact that the GOP has a legislative goose egg deep in the third quarter, its doubtful investors are pricing in any real fiscal reforms.
I’ve been skeptical that comprehensive tax reform could get done in 2017 believing that there’s little runway left before January and the unofficial start of the 2018 election cycle. If I’m wrong and last week’s agreement leads to other bipartisan efforts than I’m confident equity prices will jump back onto I-95 North, even if it means further multiple expansion. Without it, stocks will have to find their way based on their own fundamentals with very little tailwind coming from Washington.
Outside the U.S. the picture is a little brighter, as the MSCI and of course emerging markets are seeing their best performance in years after spending the last decade in a coma. Mario Draghi says there won’t even be a discussion about exiting QE until later in the fall, sending Wall Street economists back to the drawing boards. My guess is the ECB will find it just as tough as the Fed with delays and disappointment the norm.
The September October time frame is a favorite of the media who are quick to remind us history hasn’t been kind during these months. With the average return for September coming in around negative -0.7% it begs the question, why not step aside and jump back in after the storm passes?
Of course, this is one of those Investor Almanac predictions that works every time right up until the time I use it. I’ll stick with income statements and balance sheets rather than the calendar as my market GPS.
In the mean time we still have another month before looking at Q3 earnings. Nevertheless, we have a heavy calendar of economic reports to wade through next week. At the top of the list is Thursday’s CPI with all investors looking for any sign inflation is picking up as it is a key data point for the Fed and will likely set the pace for any other rate hikes this year. With 10 year yields threatening to break below 2% it’s a safe bet investors have rushed to the other side of the boat. With so many crowded into the perceived safety of sovereign debt offering just 2% will investors view any progress in Washington as clear skies or just the eye of the storm?
*At the time of this article some funds managed by David Nelson were long SPY, GLD & TLT