Still Waiting for Godot

Populism and Washington dysfunction are two key risks for markets in 2017, and last week was an important one for both. So-called “Comey-Mania” gripped the nation as FBI Director James Comey appeared before the Senate Intelligence Committee on Thursday, June 8, in his first public testimony since being fired by President Trump in early May. Despite extensive coverage both leading up to and following Comey’s testimony, markets mostly saw it as a nonevent.

In fact, the bigger event of the day occurred overseas. UK Prime Minister Theresa May’s bold gamble to call a snap election resulted in an outcome as unexpected as Brexit. What began as an attempt to create a larger Parliamentary majority and secure an electoral mandate heading into negotiations to leave the European Union, turned into a stunning defeat, as May’s Conservative Party lost 12 seats and its overall majority. A hung parliament makes the nature or form of Brexit difficult to handicap. The tone of European populism isn’t as severe or all-encompassing as many expected last year. Though the United Kingdom seems to want to be populist, the fact that it now has a hung parliament makes it appear that voters favor a “soft” Brexit.

Uncertainty now looms over the future of the Brexit movement, and has, in turn, spread to currency markets, with the pound falling sharply last Friday. Next up, all eyes will be on Germany as Chancellor Angela Merkel hopes to be reelected in September. Similarly, back across the Atlantic, we expect uncertainty in our nation’s capital to continue, leaving us still waiting for Godot.

What Investors Need to Know

Rather than getting dragged into the shock and awe headlines of the 24/7 news cycle that can leave even casual observers feeling metaphorically whiplashed, investors should keep the following in mind:

1. Regardless of politics, economic fundamentals have improved, especially internationally. The global economy is doing better, particularly in Europe and Japan, with expectations for continued growth. Global earnings have seen tremendous growth, supporting market valuations. [1] Additionally, the Fed indicated yesterday that the economy is strong enough to continue raising interest rates. All of these are reasons why markets simply yawned last Thursday.
2. Markets ultimately care about the Republican Party’s ability to implement its pro-business agenda in an efficient manner. The passage of tax reform, deregulation (both financial and healthcare), and infrastructure spending policies matter to markets more than the controversy surrounding potential Russian interference in the U.S. presidential election. Though markets may experience volatility as the Washington circus continues, they will take more lasting cues from the passage of this legislation.

With 2018 mid-term elections less than a year and a half away, many expect to see Republicans increasingly willing to compromise in order to “get something done.” Congress returned from recess for the first of two summer sessions last Monday, and there has already been renewed energy with the White House’s introduction of “Infrastructure Week” and the House’s passage of the Financial CHOICE ACT, which would repeal a number of Dodd-Frank’s key provisions. Though there remains a long road ahead through Congress, any observed headway in the passage of pro-business policies is likely to boost markets.

Balentine will continue to watch geopolitical developments and share our thoughts about potential market implications with clients. In the meantime, don’t hesitate to contact your Balentine relationship manager with questions.

[1] Earnings on the MSCI All Country World Index (ACWI) are projected to be up ~7.5% in the second quarter.