What's Up This Week - Week of September 23, 2019Submitted by Trace Wealth Advisors on September 24th, 2019
"It’s the Economy, Stupid!"
Congressional leaders are moving forward on impeachment…
In a televised speech on Tuesday afternoon, House Speaker Nancy Pelosi announced the start of a formal impeachment inquiry against President Trump due to his involvement in a brewing scandal that threatens to further divide an already divided government. While it’s unlikely that any actual vote in the House would pass the Senate, the symbolism is obviously a big part of what the House Democrats are going for. Markets didn’t initially react terribly well to the ongoing turmoil with a sharp intraday turnaround lower on the major exchanges to show for it. At time of this writing, equity futures look weaker and the added uncertainty is unlikely to help things in the short term.
Why does it matter?
For those of you that consider yourselves long term investors, it doesn’t matter at all. This is really just noise but, as a long term investor, you should be used to encountering a fair amount of noise every so often. Fear and volatility are the entry costs for the returns that risk assets provide over the long haul.
For those of you interested in what might happen in the short term, we have absolutely no idea…but here are some thoughts:
The President is more likely than not to serve his full term at this point and it’s anyone’s guess who his opponent will be in the 2020 election. If things continue on as they have been, the economy is likely to continue on a solid pace domestically, with impeachment proceedings unlikely to upset the main driver of economic growth (consumer spending) any time soon,. When it comes to analyzing the effects of impeachment on the markets, don’t forget James Carville’s famous line, “it’s the economy stupid.” As long as things stay on track, markets are more likely than not to see past politics and trade on fundamentals.
In overly simplistic terms, the economic backdrop looks much more like it did during the impeachment proceedings against Bill Clinton in 1998 than during the impeachment proceedings against Richard Nixon in 1973-74 which is probably a positive thing. That said, the world is a different place today and we wouldn’t advise basing your investment decision making on either of these very isolated instances. In short, continue to focus on what you can control…politics ain’t it!
The Fed Yawn
The Fed continues to take a more supportive stance as investors yawn…
The Federal Reserve Open Market Committee (FOMC) met last week and lowered its benchmark interest rate by 0.25%...the markets responded with a gigantic yawn. Given the hotly anticipated nature of Fed Chairman Powell’s post-meeting remarks amidst President Trump’s attacks on him and a brewing trade war with China, the event was altogether underwhelming to say the least. Powell stuck to a pretty tight script, complimenting the continued positive economic momentum in the U.S. and expressing concern over trade tensions and the economic weakness outside of the U.S.
Of note from the FOMC’s meeting minutes, however, were two factors:
- Three Fed members dissented from the 0.25% interest rate cut decision, with two (George and Rosengren) arguing the case for keeping rates stable and one (Bullard) arguing for a more aggressive 0.50% cut.
- The so-called “dot plot” (FOMC member expectations for the path of future interest rates) continued to soften amidst a slower global economic environment and trade tensions. FOMC members have consistently overshot on their expectations for rate increases and this meeting affirmed that they now admit they had been overly optimistic even three months prior.
Why should we care?
The two factors cited above from the meeting minutes are important. If we continue to see the Fed show further dissent within its ranks, it could lead to policy uncertainty, which could lead to further market volatility. Additionally, inaccuracy in the dot plot only underscores that the future predictions on behalf of Fed members are about as reliable as any of the rest of ours…which is to say not reliable at all.
The Fed’s policy rate is a factor in determining everything from what you’re paid on your cash deposits to how willing banks might be to lend at any given point in time. In short, it’s important to understand because it impacts almost every financial instrument around you.
The WeWork saga continues…
Following the recent news of We Co. (WeWork’s parent company) shelving its IPO, there have been a flurry of news stories surrounding the company and its “interesting” founder, Adam Neumann. The latest update is that Neumann will be stepping down from his role as CEO to become non-executive chairman. This undoubtedly pushes out an already delayed timeline for We Co.’s IPO and pressure will continue to build on the underlying business.
Why should we care?
Well, for starters, this whole thing is an amazing story that is starting to read like a soap opera! But, more importantly, this really makes the case for how important public company disclosures are to investors not only understanding businesses but also holding their executives accountable for performance.
As I wrote on the blog last week, this shows how price discovery works in public markets and why it’s so vitally important. This whole episode shows the imperfection of the private investment model. Whether it’s real estate or direct investments in private operating companies, valuations can often be way off given several factors:
- There are fewer investors attempting to price the asset.
- There is usually asymmetry in the information available about the investment.
- There are all sorts of behavioral biases present in markets and private markets are certainly no exception.
So…even when they go down, take heart in the fact that you know what your boring old stock and bond portfolio is worth on any given day…the same can’t be said of most of your other investments.
You're now up to date...hope it's a great week!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth in this material may not develop as predicted.