Rest Your Eyes

Rest your eyes.  Stocks took a break yesterday, snapping a five day winning streak, and traded down modestly.  It was a slow news day and investors took the opportunity to shop for gifts rather than stocks.

N O T E W O R T H Y

• It’s about the economy, stupid.  Well, it finally happened, President Trump was impeached by Congress for abuse of power and obstructing Congress.  So now what?  You don’t often see me writing about political issues, unless there is potential impact on Wall Street.  That begs the question: will the President’s impeachment and pending Senate trial have an impact on the markets?  Well, we can look back in history to the two most recent impeachments of Nixon and Clinton, but two events alone make forecasting a difficult, if not foolish, task.  But let’s give it a try, at a high level of course.  President Nixon’s impeachment took place between February and August of 1974 and ended with his resignation.  The S&P500 fell almost -20% during that period, depending on which actual days you include (I went with the 1st of each month).  In the wake of Nixon’s resignation, stocks fell another -12% through the end of the year.  President Clinton’s impeachment began in January of 1998 and lasted through February, 1999 and ended in his acquittal by the Senate.  The S&P500, during that interval, climbed by around +30% and the index added another +13% by the year end.  So, two impeachments and two very different scenarios… you knew this wasn’t going to be easy.  Maybe not.  In 1974, the US economy was in the midst of a recession, triggered by stagflation and the 1973 oil crisis.  During Clinton’s impeachment, GDP was growing between +3.1% and +6.6%. quarterly, annualized.  So it is safe to say that the economy was doing badly during Nixon’s impeachment and booming during Clinton’s.  We can agree that a good economy means a good  stock market and vice versa.  The economy today is certainly not growing at the same pace as back in 1998, but it is growing.  Stagflation, which is characterized by high unemployment, a shrinking economy, and high inflation is clearly not present today.  The last read of GDP had it growing at +2.1% annualized.  That probably has something to do with the fact that the S&P500 has risen by +7.57% since President Trump’s impeachment inquiry began in September.  The Senate will take up the matter most likely after the new year, but will it even matter for the market?  One thing that will matter, as history shows us, is the economy.  Tomorrow, we will get a read of GDP, which is expected to show an annualized growth of +2.1%, same as the last reading.
• Across the seas.  The US and China appear to have made nice and shook hands over the Phase One trade deal.  Markets rejoiced in at least knowing that some progress is being made, as expected.  Details of the deal are still somewhat sketchy and officials on both sides are reluctant to provide any more details than were made public last week.  The reason is probably that there are not many more details to share.  The deal is scheduled to be signed in January at which time we will get a better look at what the deal is about.  But for now, we can take a little worry off the table knowing that both sides are keen on getting something done.  That takes care of the fight across the Pacific for now.  What about the Atlantic?  Remember the on-again off-again sneers traded between the Administration and EU officials?  Probably not because the battle with China was always top of news.  Now that China is somewhat on a path to closure, the Administration is setting its sites back on the EU.  Two days ago, Robert Lighthizer said that trade with the EU is “unbalanced” and, that the US is prepared to turn up the heat in order to decrease the trade deficit.  Who said this was going to be easy?

THE MARKETS

Stocks slipped slightly yesterday, which was lacking in news.  The S&P500 dropped by -0.04%, the Dow Jones Industrial Average slipped by -0.10%, the Russell 2000 advanced by +0.25%, and the NASDAQ Composite Index inched up by +0.05% to a new high.  Bonds pulled back and  10-year treasury yields added +3 basis points to 1.91%.

NXT UP

– Philadelphia Fed Business Outlook is expected to have fallen to 8 from 10.4.

– The Conference Board’s Leading Economic Index is expected to have grown by +0.1% compared to last month’s drop of -0.1%.

– Existing Home Sales may have dropped by -0.4% after having climbed by +1.9% last month.

– We expect to hear from Rite Aid and Conagra before the bell, while Nike will release its results after the close.

daily chartbook 2019-12-19