What’s on Tap: Government Gridlock May Be Good for Wall Street

WOT Blog Graphic Template 11.13.2018.png
  • Midterm Election Takeaway: Politics Don’t Drive Long-Term Profits

  • Fed Sees Growth Ahead; Bullish Outlook Remains

  • Good Yields Aren’t Hard to Find: Silver Lining for Rising Interest Rates

  • Looking Ahead to Inflation, Retail Sales and Manufacturing

With the midterm election mostly in the books—save a few tightly contested races yet to be squared—we saw a relief rally for U.S. stocks that reverberated through global markets. The bounce was short-lived though, as market and economic risk factors have come back into focus.

Among the host of known risks we’re watching closely: Trade-war rhetoric with China, the Mueller investigation, renewed conflict with Iran, emotional investor behavior and unrelenting partisan pressure on both sides of Congress’ aisle. We know, however, that while these risks are front and center in our daily news feeds, it’s still earnings and interest rates, and the consumer’s ability to continue spending, that drive stock prices over the long-term.

For the year through Thursday, the Dow Jones Industrial Average has returned 8.0%, while the broader S&P 500 has gained 6.7%. The MSCI EAFE index, a measure of developed international stock markets, is off 7.1%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has climbed to 3.66% from 2.71% at 2017’s end. On a total return basis, the U.S. bond market has declined 2.6% for the year.

Midterm Election Takeaway: Politics Don’t Drive Long-Term Profits

Given the loud and vociferous rhetoric that surrounded this week’s midterm elections and the stock and bond markets’ reactions to it, there’s little wonder that some investors believe what happens in Washington will dictate what happens on Wall Street.

That simply isn’t the case. We see one of our jobs as separating the near-term politically charged discourse from our long-term investment decision-making process. If October and the last week have demonstrated anything, it is that politics do matter for traders and can impact the market in the short-term. But for investors like us it’s more often than not a sideshow. That’s not to say politics are not important or that they don’t play on investor emotions. But, most of the time, they are not a direct driver of long-term stock market profits. 

The factors that matter most to us continue to support cautious optimism. Consumers have jobs, are getting raises and have not taken on massive amounts of household debt. We believe they can continue to drive economic growth. Corporate earnings are robust, and while we expect that the pace of profit growth will slow, we think earnings will continue to expand in the months ahead. Finally, interest rates are still low enough to keep borrowing affordable for businesses and individuals. 

Fed Sees Growth Ahead; Bullish Outlook Remains

As scheduled, the Federal Reserve met this week and made no changes to monetary policy; the fed funds rate will remain in the 2.00%–2.25% range. Like us, Federal Reserve Chair Jay Powell and his colleagues try to keep politics out of their decision-making process. Despite President Trump’s complaints about interest rates, Powell & Co. remain focused on ensuring that our slow-growth-not-no-growth economy doesn’t overheat. With today’s producer inflation report as a backdrop, the central bank’s policymakers will likely raise rates another 0.25% at their December 18–19 meeting. 

When the Fed governors are raising rates, they are bullish about the U.S. economy. But we also know that a lot can change between now and December. Rest assured that we’ll be watching closely for signs of duress in both the domestic and the global economies. 

Good Yields Aren’t Hard to Find: Silver Lining for Rising Interest Rates

Some bond investors and media pundits are lamenting higher interest rates because they have driven bond prices lower. But as we’ve said over and again, there is a silver lining to rising interest rates: Bond investors receive more income.

It wasn’t long ago that investors looking for a yield of 3% had to take on substantial risk by buying “junk” or long-term bonds, which carry greater default risk and heightened price sensitivity, respectively. That’s not the case today. 

As of Thursday night, the 10-year Treasury bond’s 3.24% yield, after years of sub-3% and even sub-2% levels, is about on par with where it stood seven-plus years ago in early 2011. The 5-year Treasury now yields 3.09% and the 3-year Treasury has reached 3.05%. Even the 2-year Treasury bond, with a yield of 2.98%, is increments away from that 3% level. 

In the short-term, bond investors may bemoan the lower prices that come with rising yields; in the long run, higher yields are good for savers and ultimately good for investors. 

 Note: Chart shows 10-year Treasury Constant Maturity Rate month-end yield levels from October 2008 through October 2018 as well as the 10-year Treasury’s yield as of November 8, 2018.  Sources: Federal Reserve Bank of St. Louis and U.S. Department of the Treasury.

Note: Chart shows 10-year Treasury Constant Maturity Rate month-end yield levels from October 2008 through October 2018 as well as the 10-year Treasury’s yield as of November 8, 2018.

Sources: Federal Reserve Bank of St. Louis and U.S. Department of the Treasury.

Looking Ahead to Inflation, Retail Sales and Manufacturing

Next week brings another relatively light slate of economic data, potentially giving event-driven volatility the upper hand. We’ll be looking closely at helpful reads on small business confidence, inflation, retail sales and manufacturing. 

In advance of Veterans Day, the Braver Capital team sends our gratitude to all veterans for your service to our country. Thank you.


If you’d like to learn more about our tactical or fundamental strategies, please contact Steve Johnson at 844-587-7393 or info@bravercapital.com

Please note: This update was prepared on Friday, November 9, 2018, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations or personal investment advice, or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

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