Highlights
• Despite rising political risks, equity markets are experiencing the longest bull market on record while stock prices are at new highs.
• We don’t want to discount potentially significant risks (including still-uncertain trade policy), but we also don’t believe this economic expansion and equity bull market will end soon.
Last week featured multiple negative political headlines for President Donald Trump that questioned the stability of his administration. The news was also dominated by signs of increased trade tensions between the United States and China, as well as statements from Federal Reserve Chair Jerome Powell that interest rate hikes were likely to continue. Despite the noise, however, investors continued moving money into stocks, causing the current bull market to become the longest in history and the S&P 500 Index to reach new record highs by the end of last week.1
Weekly Top Themes
1. The Fed appears on course to continue with regular, slow interest rate increases. Fed Chair Powell’s much-watched speech at Jackson Hole last week confirmed that rate increases are likely to continue and the Fed does not see any global risks that would change this approach.
2. Corporate profit margins have likely peaked for the cycle. Margins have risen to all-time highs in the first half of this year.1 While we are not calling for a sharp drop in earnings or profits, a combination of mounting wage pressures and rising interest rates will likely drag on profit levels going forward.
3. Rising productivity growth should help sustain the current economic expansion. Improving productivity has been a missing ingredient in the economic expansion for years, but that trend is changing. Improving productivity should help support profit margins and keep core inflation from rising too high.
4. We are unlikely to see significant reductions in trade uncertainty until after the midterm elections. The United States appears to be getting closer on NAFTA agreements and a resolution with the European Union about tariffs on industrial goods. Should these issues get resolved, it would likely increase pressure on China to agree to U.S. trade demands. The results of the midterms will go a long way to determining how much political capital President Trump has to pursue his trade policies.
5. The circus in Washington may contribute to additional market volatility, but it is highly uncertain how much it matters. We don’t want to make light of the mounting troubles the president faces, but we are more focused on metrics such as consumer and business confidence levels as signs of how much the political turmoil will negatively affect financial markets.