Highlights
• The third quarter was punctuated by the human and economic devastation wrought by “Harvey,” “Irma” and “Maria” and, not to be eclipsed, the bellicosity of “Rocket Man,” better known as North Korea’s “Supreme Leader” Kim Jong-un, who continues his maniacal quest for a place at the nuclear table, as well as severely misguided fantasies of taking over the Korean peninsula. While we know that the hurricane-related rebuilding efforts will soon begin and ultimately add to economic growth, the war of words between Kim Jong-un and President Trump has escalated to ever-more threatening rhetoric.
• The White House witnessed a parade of high-level departures, although the arrival of a new chief of staff, a retired general, calmed fears of chaos and disarray. Legislation for tax reform, the core of the Trump pro-business, progrowth agenda, has been derided by the political opposition as nothing more than tax cuts for the rich, even while a majority of voters see reform as necessary to simplify the cumbersome tax code, help to create jobs, and stimulate the economy with tax cuts.
• Even with the dramatic tone of headlines, and questions and concerns on the direction of domestic, foreign and military policy, along with monetary policy, markets—both global and domestic—shrugged off worries and marched to new highs.
Q4 SNAPSHOT
The end of the year is rapidly approaching, and anyone overwhelmed by recent headlines may be forgiven for thinking a little holiday cheer can’t come soon enough. However, the third quarter earnings season is promising to deliver positive results as a seemingly synchronized global economic recovery helps to underpin market performance. The fourth quarter tends to be, statistically at least, the most hospitable for markets, while the third quarter is known for heightened volatility.
This is not to say that fears have completely abated regarding the market’s ability to finish the year higher—especially if Washington can’t deliver a tax package and geopolitical tensions continue to escalate. The Federal Reserve enters the fourth quarter implementing its plan to unwind slowly the $4.5 trillion balance sheet accrued during the financial crisis, but questions remain surrounding future rate hikes and who will head the Fed as Chair Janet Yellen’s tenure ends in February 2018.
The market’s job, of course, is to look ahead and focus on what’s important to it, namely earnings, economic fundamentals and the level of risk that’s commensurate with valuations. Investors will focus on the upcoming earnings season, the details of tax reform and monetary policy, and before long will be reading the tea leaves for 2018.
THE NORTH KOREAN THREAT
President Trump’s red line regarding North Korea’s nuclear ambitions was drawn clearly and explicitly as he addressed the General Assembly of the United Nations in September. He warned Kim Jong-un, whom he said was on a “suicide mission,” that the U.S., if forced to defend itself or its allies, would “have no choice but to totally destroy North Korea.”
Still, the U.S. actively seeks a multilateral coalition to administer a broad range of sanctions against the country he labeled as a “band of criminals,” hoping that North Korea can be isolated and deprived long enough to force its leaders to the bargaining table. The president signed an executive order at the end of September that “significantly expands our authority to target individual companies, financial institutions, that finance and facilitate trade with North Korea.”
Key to enforcing deeper and broader sanctions, however, is China. According to reports, the Chinese central bank told banks throughout China to cease doing business with North Korea, but President Trump has called for more meaningful measures including cutting off completely the export of oil supplies. The Chinese, however, while wanting to keep the region calm, do not want a complete collapse of the regime, which would lead to a mass exodus of refugees across the border into China, and a war that brings the U.S. deeper into the region.
Certainly, the Chinese authorities do not want any flare-ups before their Communist Party plenum, which begins on October 18th. This is an important congress that convenes every five years during which the leadership lineup is announced, and policy initiatives are outlined.