Chris R. from Providence, Rhode Island asks: Hi Mitch, it was hard not to get worried last week with all the hysteria over the firing of the F.B.I. director and the possible obstruction of justice charges, etc… etc… If the market is going to react like that every time there’s a potential controversy in government, could it make sense at this stage to wait and see if things cool down a bit…instead of staying fully invested? To me, the risks seem to outweigh the benefits.
Mitch’s Response: Thanks for writing Chris. The equities and bond markets indeed responded fairly dramatically to last week’s breaking news. The Dow Jones Industrial Average posted its worst day since September of last year (-1.78%), and the NASDAQ experienced its biggest drop since last summer (-2.57%). The S&P 500 Index fell in virtual lockstep to those indices, dropping -1.82% with Financials notably suffering the worst (-3.1%). In my view, the market is clearly sending an age-old signal that it does not like uncertainty, and it got plenty of uncertainty last week.
I think the biggest read on this market activity is concern over whether this administration can advance its economic agenda. The “Trump Rally” was in part fueled by rising expectations that the next four years would bring tax cuts, deregulation, and an enormous infrastructure package. If the administration is spending more of its time putting out fires and warding off controversy, that means less time spent working on policy designed to boost economic activity. The market is rightfully concerned that some of these policy objectives are at stake.
I cannot definitively know where this story will go, of if the investigations will turn up anything that will be viewed as an impeachable offense. Nor do I have any professional opinion on it. What I will say is that if special prosecutors are hired and a smoking gun of some kind emerges, and impeachment proceedings ensue, that could mean trouble for the market. But, given what we factually know, we are not there yet, and I don’t think we will get a real development on this story for months.
In the meantime, I would not advocate a wait and see approach, as your question suggested. Doing so would mean going against the fundamentals of the market because of speculation on a political risk – a strategy that I cannot get behind. The political sphere in the U.S. is confusing and complicated, to say the least, but I would argue that it is not hindering or helping the economic cycle. No matter what your political orientation or feeling on these matters, the ultimate conclusion from an investment standpoint is that we are left with political gridlock – which the markets can very much handle in my view.
The markets like to zig when everything else seems to be zagging, so in my opinion this is not a time to let the political environment drive an investment decision. The fundamentals remain too healthy here in the U.S. and abroad, in my view, and they support further profit and GDP growth in 2017. That should lead to gains and relative stability in the equities and bond markets, in my view, which argues for staying the course.
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