Political scandals in Washington are a lot like cobbler: a hot mess and irresistible! Despite improved data points and recovery from the volatile markets witnessed in August, all focus turned to the events at pertaining to the formal impeachment inquiry launched by the US House of Representatives against President Trump. Some of us have seen this movie before. Some of us have seen this more than once; but for some perspective from a financial market standpoint, let’s look at the most recent history during the Nixon and Clinton administrations. Watergate was the undoing of President Richard M. Nixon (who resigned), and the Monica Lewinsky scandal, which certainly tainted but did not remove President Bill Clinton.
As Watergate unfolded in 1973-74, stocks tumbled in one of the worst bear markets of the post–World War II era. They bottomed less than two months after Nixon resigned rather than face impeachment. Stocks also fell through the Fall of 1998 as it became clear President Clinton had lied under oath about his sexual relationship with Lewinsky, then a 21-year-old White House intern. But the markets rallied as impeachment proceedings went through the House and then into a Senate trial, at which the president prevailed. Both times, these markets were affected much more by economic and market forces than by the political drama in Washington, D.C. In Nixon’s case, it was the runaway inflation of the 1970s; while for Clinton, it was the Asian currency crisis, the collapse of hedge fund Long-Term Capital Management (and a bailout led by the Federal Reserve Bank of New York), followed by the final, euphoric phase of the 1990s dot-com bubble.
Back to the markets for a moment. During September indices pushed higher for the month, and as global bond yields jumped, Value (+5.69%) outperformed Growth (+1.25%) and the reflation trade (Reflation Winners/Losers +5.61%) performed well. Global equities rallied throughout September amid dovish Central Banks, mixed economic data and expectations of improvements on the trade front.
Markets were driven by the following in September:
1) Monetary Policy: The Fed and the ECB answered to dovish expectations. The Fed cut rates by 25bp, left intact the same (dovish) forward guidance given in July, and did little to push back against market expectations for further easing. Fed Chairman Jerome Powell was quick to point out that “if the economy does turn down, then a more extensive sequence of rate cuts could be appropriate”. The ECB cut the deposit rate by 10bp, by introducing a tiered reserve charging system, relaunching QE at a pace of €20bn/m.
2) Growth: Data continued to soften but results were mixed. In the Eurozone, flash PMIs, German IFO and Economic sentiment for September all surprised notably on the downside, (Composite PMI fell -1.5pt to 50.4 -lowest since mid-2013) dragged by the manufacturing sector.
In the U.S, latest September PMIs stabilized but were far from strong with Comp. inching up to 51.0 from 50.7 in August. Although consumers kept carrying the load with retail sales for August coming in above expectations,the August Job report was good enough. In China, September PMIs improved very slightly and sent more comforting signs of near term momentum while August activity data stabilized somewhat but still came out weaker than expected.
3) Political: US – China trade negotiations improved slightly. China confirmed the next round of high-level negotiations will be held in the US in early Oct, granted exemptions on some US products from retaliatory tariff, while Trump delayed (from October 1 to 15) a tariff increase (25% to 30%) on the previous $250bn basket. China also announced they would remove additional tariffs on US imported tariffs on soybeans, pork and other goods. In Brexit, no progress was made in the EU-UK negotiations. The UK Parliament passed a law that prevent the government from taking the UK out the EU without a deal on Oct. 31. Prorogation of the parliament was declared unlawful and parliament sessions resumed, but Prime Minister Boris Johnson continued to push for an early election and to indicate the UK will leave the 31st of Oct. In Middle East, oil temporarily spiked ~20% following drone attacks on two oil facilities in Saudi Arabia but reversed most of the move as the Saudis restored production quicker than expected and as economic growth softened.
Unquestionably, trying to manage investments while navigating the blizzard of headlines coming out of DC is daunting and at times it can seem overwhelming. But it’s important to remember that in both cases, larger economic and market forces played a much bigger part in driving returns than a president’s impeachment. Irrespective of the current President’s rhetoric, fundamentals and cycles matter more than impeachments. These dynamics will ultimately dictate the tenor and trajectory of the markets. Similarly, as were the cases under both Nixon and Clinton, the economy and markets are in the very final innings of a long bull market. And while history has shown brief respites from shorter term market weakness in the wake of impeachments, business cycles matter far more. It’s important to understand the business cycle and identify changes in the corporate profit cycle as well as the credit cycle. LHT can help you navigate the business cycle and construct portfolios that maximize performance, while minimizing risks.
Everyone looks at cobbler and political scandals the same way: a hot mess that is irresistible. But what makes both of these things even better? Ice Cream! (But you can just call it “Giuliani!”)
Be sure to consult your financial advisor with any questions regarding the markets and investments. For more information about LHT Consultants as well as to receive more updates on the markets, please visit us at www.lhtconsultants.com.