To be exact, 935 Pennsylvania Avenue NW, Washington, D.C. (FBI Headquarters), the location from which this nightmare emanated. It is the Clinton Presidential Campaign’s nightmare, a late October surprise– 11 days before the general election. It sucked the air out of every other piece of news on Friday, including some very good news on the economy and third quarter GDP. This was a twist in the plot that even Stephen King or Rod Serling might not have cooked up.
The Dow Jones Industrials swung from a positive 87 points to a negative 85 point reading (a 172 point swing) before closing down 8.49. This letter from FBI dDirector James Comey to members of the House and Senate Republican committee leadership is what put the breaks on:
“The FBI has learned of the existence of emails that appear to be pertinent to the investigation (of former Secretary Clinton’s email server)… “Although the FBI cannot assess whether or not this material may be significant and I cannot predict how long it will take to complete this work, I believe it is important to update your committee …” (FBI Director, James Comey).
As my mother-in-law would say, “Bog-Minding.”
So, what did we miss?
We missed a 2.9% jump in third quarter GDP … The largest increase in the past two years and above the 2.5% estimate. The naysayers will point out that this report follows several quarters of pretty punk performance in that number, but that is what naysayers do … even as their continuing negative pronouncements fail to materialize.
One of the reasons for dire predictions is the potential that the Federal Reserve will move to raise interest rates again this year, which all know would be a disaster (NOT). Even before Friday’s return to ‘Clinton email Hell’, rate concerns were weighing on the market accentuated, of course, by media speculation the next move might come as early as this week … “How the Fed could pull a November surprise”–Patti Dom, CNBC, Weds. October 26,2016.
The stock market has been drifting lower over the past month in part because of this concern, and the bond market has been on its heels as prices have fallen and rates are up. In the case of the 10-year U.S. Treasury note the rate is up some 30 basis points (1.55% to 1.85%). So, when the market was rallying on the GDP news of Friday, the ten-year was falling again, yielding almost 1.87% when news of Mr. Comey’s letter hit the tape. This upward action in the market while rates were on the uptick gives credence to the idea that rising rates in a stronger economy would not spell curtains for the bull market. This is a theme I’ve been highlighting for some time (most recently– “Rising Rates–A Knockout Blow?”). For further examination of this question you may want to check out this piece, “A Century of Stock-Bond Correlations.”
What about earnings season? How are we doing?
As of Friday, October 28, according to FACTSET EARNINGS INSIGHT, 58% of S&P companies have reported. Of those 74% have reported earnings beats with 58% reporting revenue beats. The blended earnings growth of those already reporting comes in at 1.6%. “If the index reports growth in earnings for the quarter, it will mark the first time the index has seen year-over-year growth in earnings since Q1 2015 (0.5%).” Remember, at the beginning of this quarter many were forecasting down earnings for the S&P and a continuation of the earnings recession (which was largely due to losses in the energy sector and the impact of a strong dollar rather than widespread economic weakness).
Finally, I try to avoid politics with kortsessions, but …
The market winced last Friday on the revelation of more potential email trouble for Hillary Clinton (the nightmare). It winced on the prospect that Donald Trump might, again, have an opening, a small but potential opening on a path to the Presidency. For those of you on the lookout for a Black Swan, something that would really roil the markets, I believe a Trump victory November 8th, would definitely be such an event. Trump is viewed by his supporters as a ‘change’ candidate.Part of the attraction is his unpredictability, which may be refreshing to some but not to Wall Street. In the eyes of many he ‘chaos’ is the ‘chaos’ candidate. Chaos breeds uncertainty and uncertainty is bad for the market.
Bottom Line: The economy and market both appear to be doing OK, despite Friday’s “Nightmare on Pennsylvania Avenue” and the fright it sent through the market about the possibility of a Trump Presidency.
What is your take?
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1 thought on “Nightmare on Pennsylvania Avenue”
I wanted to compliment you on your restraint when it comes to politics in this blog. Since politics is (or should be!) about policy, and policy can have such an impact on the economy and the markets, it would be impossible to avoid some discussion about politics here. You have done a remarkable job of keeping this blog focused on the markets. Thanks for your continued stream of insights and learned observations!
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