Key Points

  • U.S. markets were roiled by so-called "unprecedented" political issues but bounced back quickly. Investing based on political winds is not likely to be a successful strategy and we urge focus on economic and earnings fundamentals.
  • The U.S. economy is bouncing back from the weak first quarter while the labor market continues to tighten. A June rate hike by the Federal Reserve remains on the table for now.
  • Global growth has picked up, but the recent slowdown and inversion of the yield curve in China are causing some concerns.

Politics invades the market

Political instability is in play these days with regard to the markets, but there are times when they move front-and-center. That occurred recently as impeachment of President Trump was brought up on the floor of the House of Representatives, and concerns spiked that the business-friendly portion of the President's agenda would fail to get enacted. Pundits and politicians are quick to pull out the "unprecedented" phrase to describe multiple actions by the current President and his staff. We aren't here to debate the merits or wisdom of the actions in question; just to point out that investors shouldn’t get too caught up in the political wrangling's with respect to investing decisions. It would not be unprecedented for Congress to criticize the president, or for the president to have missteps; although clearly impeachment is much less common. The institutions of U.S. government are not threatened, and, in fact, are working as the founders intended them, with the legislative and judicial branches providing checks and balances to the executive branch and vice versa. So we suggest keeping an eye, or maybe a squinted eye, on the political issues, because they can impact investment decisions at some point; but remain focused on your longer term goals and the more market-influencing fundamentals of economic and earnings growth.

The recent sharp, but single-day pullback was not extraordinary based on history and in fact may have been a healthy move as it allowed some of the overly optimistic sentiment conditions and complacency to ease. Stocks will likely experience more bouts of volatility in the coming months due to both political surprises and Fed policy communications. But we believe the trend can continue to be higher and that we remain in a secular bull market.

Recent pullback in context of market move since election

Recent pullback in context of market move since election

Source: FactSet, Standard & Poor's. As of May 23, 2017. Past performance is no guarantee of future results.

Earnings were strong and economy looks good

Reasons for our continued optimism include the mostly-completed earnings season which, according to Bloomberg, saw close to 80% of companies in the S&P 500 beat consensus earnings estimates; while more than 60% beat on the revenue estimates, a high historical beat rate for top-line growth (which is harder to manipulate). And despite ongoing political uncertainty, corporate confidence is holding up for now. The Empire Manufacturing Index slipped into negative territory at -1.0, but the Philadelphia Fed Index surprisingly rose to 38.8 from 22.0. Homebuilders also remain optimistic as the National Association of Homebuilders (NAHB) Housing Market Index (HMI) rose to a robust 70 from 68.

Homebuilders optimism rising

Homebuilders optimism rising

Source: FactSet, National Assoc. of Home Builders. As of May 23, 2017.