INSIGHTS

MARKETS LOOK BEYOND NOISE IN WASHINGTON

Mark Lister, 29 May 2017

Political scandals provide plenty of fodder for news bulletins, although financial markets are much more concerned with investment fundamentals. While the US economy is performing well and corporate earnings growth is improving, markets will look past the noise emanating from Washington.

President Trump has created headlines from day one. Immediately after the election, it was optimism surrounding policies to boost economic growth. More recently, he has been under pressure as speculation swirls about the prospect of impeachment.

Markets have taken this all in stride. There was one particular day where US shares fell heavily, and many thought this might’ve been the beginning of a correction.

However, investors shrugged this off quickly, pushing the market back up again. If you were sitting on the side lines ready to “buy the dip”, you needed to be fairly fast to do so.

I think there’s a couple of reasons why the political drama has been largely ignored. Firstly, he’s unlikely to be impeached anytime soon, nor is the Trump policy agenda at risk of major derailment.

Impeachment is more of a political process than a legal one. The House of Representatives would need to vote in favour of impeachment, and an even stronger majority would be required in the Senate to fully oust him from office.

Both the House and the Senate are controlled by Republicans, and although there is some discontent within the party, the support required to get rid of their leader just isn’t there.

For all his faults, Trump is still polling well with Republican voters, so his colleagues in Congress know better than to risk a backlash from those who put Trump there in the first place.

Tax changes and deregulation remain pillars of his policy agenda, and these are still likely to go through. The Republicans have their differences, but they broadly agree with the President on these issues.

More importantly, markets are much more concerned with the economy and corporate earnings growth, rather than shenanigans in Washington. In this regard, things are looking up.

The US had a poor start to 2017, with disappointing data and an apparent “soft patch” in the economy. This always seems to happen in the early part of the year, and the second quarter is likely to stage a rebound.

The US reporting season was very strong, with March quarter earnings growth posting the strongest gains we have seen in almost six years. This also suggests we shouldn’t put too much weight on slighter weaker data, and is probably the main reason share markets have been in such good spirits of late.

Against this backdrop Trump looks safe, although 2018 could be interesting. The mid-term elections will see all 435 seats in the House of Representatives contested, as well as a third of the Senate. A good showing by the Democrats would certainly put him at risk.

Watch this space, and expect Trump to dial up the populist rhetoric again, as he tries to strengthen his position ahead of this. The question is, will rhetoric still be enough if voters haven’t seen enough concrete evidence of change by then?

This article was published by The New Zealand Herald on 29 May 2017.