I’m sure you are aware of the swirling controversies in Washington that are creating significant uncertainty for market participants. Markets rise and fall based on the latest headlines, announcements, statements, and rumors.
Investors detest uncertainty. What we have now is a ramping up of uncertainty related to the political situation in Washington. One might try to make logical assessments of what this news might mean for the market and economy; that desire is certainly understandable. However, market movement based on uncertain events are difficult to predict and it’s fair to say that on the short term, any assessments are merely random.
If one looks back two decades ago to see what type of volatility occurred during the last presidential fire storm, there certainly was market volatility based on that event. According to a recent CNBC article, the following occurred:
Stocks have previously struggled when a president faces the possibility of impeachment. In 1998, the S&P 500 fell about 20% at one point from its high to its low as independent counsel Kenneth Starr ramped up his investigation of President Bill Clinton for perjury and obstruction of justice, according to CFRA. The market would bottom as the House began impeachment proceedings and then would later recover all those losses and hit an all-time high in November of that year.
Source: September 24, 2019, CNBC.com article by Fred Imbert
Uncertainty equals volatility. As we have seen over the course of the last few years, uncertainty probably is likely to continue given the difficult times that we live in combined with global tensions.
Here’s something to keep in mind. What really drives the economy are corporate earnings and GDP expansion. A low unemployment rate combined with low inflation adds fuel to economic growth. Low interest-rates tend to provide support for economic growth. A stronger economy fuels stronger earnings growth and in the end that’s what drives stock prices. It is easy to see now why markets have rallied despite incredible news headlines.
Of course, one cannot dismiss a slowing economy which is why the Federal Reserve has taken action to reduce interest rates. Additionally, high deficits are never a good thing and will likely create economic headwinds until long-term deficits are paid off. International tensions are a problem as well as wage pressure from emerging market labor competition.
There’s a mixed bag of issues that will impact equity and fixed income asset prices. Zeroing in on one issue (today’s political headlines) sometimes clouds the reality that there is a complex mix of issues that one needs to assess.
It would be great to be able to provide an easy answer, but there isn’t one. What is needed is an assessment of all of the issues that might impact portfolios and that is what we’re focused on here at Destination Wealth Management. We will continue to sort through the many factors, not just one, as we make assessments on how to invest assets.
Any questions, as always let us now. Happy to help.