Lately, my email inbox has been flooded with questions from worried investors:
“Louis, what is going to happen with the Mueller investigation? Could these politics infect the financial market?”
Now, my longtime readers know that I’m a numbers guy, not a politics guy. However, I’m closely monitoring the latest developments in Washington. So, today let’s talk about the political climate and what’s going on inside the D.C. beltway. I’ll review what folks are worried about, as well as what I expect will really move the market.
For the past few months, there have been rumblings coming out of our nation’s capital.
Due to the ongoing investigation led by Special Counsel Robert Mueller, the political media has been throwing around the “I” word more often. The speculation is that if Michael Cohen, President Trump’s former personal attorney, helps Mueller with documenting possible campaign finance violations, as well as a conspiracy to collude” with Russia, then it’s possible that Mueller may recommend impeachment.
Now, that’s the gossip. Mueller would need tangible evidence of “high crimes and misdemeanors” before recommending impeachment. Also, a sitting President cannot be impeached for any actions he committed before his term.
And even if such a recommendation is made, Congress would make the ultimate choice. The House of Representatives would initiate the proceedings, which would be unlikely to go through with a Republican-controlled House. And even if it made it through the House, it’d still require a two-thirds vote from the Senate.
The good news is that the stock market hasn’t reacted negatively to this political climate yet. I suspect that folks outside of the beltway are largely ignoring it. Instead, many Americans remain focused on how the U.S. economy is doing. And during the mid-term elections, I suspect that political consultant James Carville’s saying will hold true: “It’s the economy, stupid.” It will be hard for either political party to find another theme to get voters excited.
I mean, just consider the latest data from the Commerce Department. The second quarter was the strongest quarter for the U.S. economy since 2014. Lower taxes and a solid jobs market have given U.S. consumers more confidence to spend, and that’s boosted the overall economy. So the Commerce Department increased its second estimate for second-quarter GDP growth to 4.2%. That’s up from the initial 4.1% estimate.
Turn $10,000 into $133,900
So right now, the political climate isn’t producing more stock market risk. Instead of focusing on gossip, I’m keeping a close watch on another development in D.C. That is, the Federal Open Market Committee’s (FOMC) upcoming meeting on Sept. 25 and Sept. 26.
At this meeting, the FOMC is expected to raise key benchmark interest rates by another 25 basis points. Currently, key interest rates are in a range of 1.75% and 2.0%. An increase in September would mark the third hike of 2018.
That may move the market a bit.
However, it’s becoming less likely that the Fed will raise rates after September. Another rate hike would depend a few things. First, inflation would have to pick up. As the U.S. dollar has strengthened, inflation fears have ebbed. So, if the Fed maintains its 2% inflation target, there isn’t a reason for it to raise rates beyond September.
Also, the Fed has kept a close eye on Europe. The recent collapse of the Turkish lira was a serious development, and it hurt European banks. That will likely cause the European Central Bank (ECB) to remain accommodative and to postpone any interest rate hikes until late 2019. And a more cautious ECB could rub off on the Federal Reserve, making any key interest rate increase past September even less likely.
Finally, the Fed will be watching market rates carefully because it doesn’t want to invert the yield curve. So, I expect that at its September meeting, the Fed will announce that it’s following a “neutral” policy. That is, the Fed will not raise key interest rates unless inflation exceeds its 2% target.
Even if the Fed raises rates in September, it shouldn’t derail the stock market too much. Stocks remain the best game in town, even in a rising rate environment. This is because dividends are taxed at lower maximum rates than income from bonds. So the S&P 500’s almost 2% annual dividend yield should provide a floor under the stock market.
To sum it up, the political climate is anything but settled right now. I’m monitoring all these developments closely. As it stands, the Fed’s upcoming interest rate meeting is where investors should be looking, not necessarily the White House.
Sincerely,
Louis Navellier
