Equity Markets Have No Time For Geopolitics - It Seems

Equity Markets Have No Time For Geopolitics - It Seems

May 08, 2017 at 6:30 PM

In my last post, I had alluded to the notion that there was nothing very special in the 100 day benchmark, in measuring the impact that Presidents have had. After all, the measure was introduced during FDR’s roller coaster of legislation introduced to set back a depression era freefall of the economy. To make the point, Sean Spicer, the White House press secretary, labelled the 100 days as an “artificial benchmark” in one of his carnival like atmosphere briefings, and Trump followed by calling it a “ridiculous standard”.

Actually, come to think of it, a lot has happened in just the last month or so:

  • The ‘nuclear option’ was triggered to bring in a Supreme Court Justice.
  • The US dropped a mega, mother of all bombs in Afghanistan, and hit an air base in Syria, sending a message to its Russian backers.
  • North Korea and the US are engaged in a show of continuous hostility towards each other, with both sides “keeping all options on the table” that is… the doomsday scenario hype.
  • Trump finally came out with his long awaited Tax Plan.
  • May called for an early election to capitalize on gaining some bargaining chips on Britain’s exit from the EU.
  • Erdogan took hold of Turkey and extended his stay.
  • Le Pen and Macron made it to the final two in the French elections, giving France a breather on the EU matter.
  • The Wall, the Border Adjusted Tax, China as a currency manipulator, and NAFTA, seem to be losing momentum at least for now.
  • North Korea fired off another failed missile test to bring down the curtain on the 100 days.

Yes all of this over the last few weeks.

On the economic news front here’s what happened:

  • A strong ADP jobs report came out with the unemployment rate at 4.5%, the lowest it has been for quite a few years.
  • The FOMC took a hawkish stand and indicated that equity valuations were high.
  • NASDAQ crossed the 6,000 point mark…it took 17 years for it to climb from the 5,000 mark.
  • Just last week, the US came in with a growth rate of just .7%, the slowest in the last three years, on the same day, the consumer sentiment index climbed to 97.

And yet, surprisingly, the equity markets seem to be ignoring the political backdrop as just noise, expecting better days ahead for the US and world economy.

The Tax Plan was released recently, with the highest tax rate cuts in generations, bringing in fresh worries of budget deficits, and talks of the possibility of an impending recession. By some counts, the US economy would have to grow at a 5% clip to avoid a major recession. Trump has reiterated on several occasions that he is expecting the economy to grow at a 4% rate, which would be a very welcome surprise. Furthermore, the massive outlay for infrastructure spending is still in the cards, and one has to seriously wonder how the numbers add up.

From an investment perspective, gold has shown a steady increase since mid-December, and in my opinion, this serves as a perfect hedge against any impending black swan events.

Since the first week of March, the US dollar has been on a downward trend due to the Administration’s attempts to make the dollar more competitive, and by some counts, the US dollar may have run its course for the time being.

Emerging markets have returned a colorful 18% over the last year, compared to the S&P which has returned 15.7%. 

The current P/E Ratio for the S&P index stands at 24, which is on the high side compared to its averages.

In this environment, it would seem that the risk horizon needs to be evaluated carefully. The potential for a further uptick in the market is certainly present, but the potential for a substantial decrement in equity values seems to be higher. It may make sense to free up some cash for a rainy day.

Category: Business


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