The last week’s market highlights:
Quote of the week:
“I was riding number nine, heading south Caroline.
I heard that lonesome whistle blow.
I got in trouble had to roam, I left my gal ‘n left my home.
I heard that lonesome whistle blow.”
Johnny Cash, “I Heard that Lonesome Whistle”
Each week, we present our featured topics in the context of the major themes listed below from Nuveen’s Midyear Outlook :
- U.S. economy: Late cycle but no recession
- Global economy: Still looking for a bottom
- Policy watch: Easy monetary policy to offset restrictive trade policy
- Fixed income: Volatile interest rates but no breakout in either direction
- Equities: Get defensive, stay invested
- Asset allocation: No longer “risk on,” but still prefer emerging-market bonds
Impeachment scenarios add to policy uncertainty but don’t really change the investment outlook
One can’t blame markets for having a touch of indigestion given the mix of unsavory ingredients currently stewing in the global investment slow cooker: the U.S./China trade dispute. Brexit. Attacks on Saudi Arabia’s oil fields. Global growth concerns. And now the potential impeachment of U.S. President Donald Trump.
Last week, House Speaker Nancy Pelosi announced she would initiate an impeachment inquiry. The decision was driven by allegations that Trump withheld military aid to Ukraine in order to pressure President Volodymyr Zelensky to investigate the local business activities of Hunter Biden, son of former vice president and current presidential contender Joe Biden.
History doesn’t offer much of a roadmap for market behavior in these types of circumstances. Reviewing how stocks performed during prior impeachment periods may be interesting but isn’t terribly instructive for investors looking to position their portfolios. There have been only two such periods in the past 45 years, and they took place during radically different economic environments:
- Between February 6, 1974, when the House authorized an impeachment inquiry against then-president Richard Nixon, and August 9, 1974, when Nixon resigned, the S&P 500 Index fell 13.2%. But during that stretch, the U.S. was in the midst of a recession fueled by the 1973-74 oil crisis and already in the teeth of a bear market. To what extent the political drama contributed to the market’s decline is hard to say.
- In the four months from the day the House voted to begin impeachment proceedings against former president Bill Clinton (October 8, 1998) until his acquittal in the Senate (February 12, 1999), the S&P 500 soared 28%. It’s far more likely the market’s rise was fueled by a roaring economy in the midst of the dot-com boom than by Clinton’s trial.
Based on the current configuration of Congress, the odds of Trump’s being removed from office are low. Even if the House votes to bring charges against him, a two-thirds supermajority is needed in the Senate to convict. Republicans hold 53 of the 100 seats in the senior chamber. Absent the introduction of highly incriminating evidence, all (or nearly all) are likely to vote “Nay.”
Assuming Trump remains president, how might the impeachment process affect the 2020 presidential election? Given today’s highly polarized political landscape, Democrats’ attempts to oust Trump may actually boost his bid for a second term. (The Trump re-election campaign reportedly received $13 million in donations in the two days following Pelosi’s announcement.) Moreover, his opponent won’t be determined until next summer.
Still, we can identify a few trends and themes that have already affected market performance or may do so as we get closer to Election Day 2020:
- In terms of new legislation, the possibility of “Medicare for all” and other significant changes to the U.S. health care system have weighed on health care stocks, by far the worst-performing sector (+4.7%) in the S&P 500 year to date. The CEO of United Health Group, for example, claimed that enacting such a law would lead to “wholesale disruption of America’s health system.” Energy, the S&P 500’s second-worst performer (+6.8%), has been hurt by proposals to ban fracking, a method of extracting shale oil.
- On the fiscal front, Democrats have called for higher personal and corporate income taxes. Some have also embraced a wealth tax— a levy on the value of accumulated assets—as a way to fight income equality and fund social programs.
- Many candidates have vowed to unwind the sweeping deregulation that has been a hallmark of Trump’s presidency, especially regarding environmental, banking/trading and energy policies.
Against this backdrop, the prevailing wisdom is that a continuation of Trump’s platform would be bullish for stocks, while his defeat would be bearish. We don’t think the outlook is that cut and dry. In particular, the president’s protectionist trade policies have crimped equities and may continue to do so. To illustrate, since March 1, 2018, the day he announced plans to impose tariffs on steel and aluminum imports, the S&P 500 Index has produced a cumulative total return of just 12.6% despite massive fiscal stimulus and last year’s stellar corporate profits.
Meanwhile, trade-induced uncertainty has begun to hurt the U.S. economy. Second-quarter GDP growth, which registered just 2%, took a combined 1% hit from reduced business investment (-0.1% negative contribution to GDP) and a decline in inventories (-0.9%), as companies postponed or withdrew expansion plans and drew down their stock of finished goods.
Third-quarter equities/fixed income recap: Fasten your diversification seat belt
The third quarter hasn’t been a banner period for investors. Global economic growth remained slow but stable. The JPMorgan Global Composite Purchasing Managers’ Index (PMI) slipped to 51.3 in August from 51.6 in July but held above the 50 mark separating expansion from contraction. The slowdown was centered in the services (nonmanufacturing) sector—a potentially worrisome indicator that weakness in manufacturing might be spilling over. Manufacturing PMIs have been in or near contraction territory for much of the year.
The U.S. economy demonstrated a similar dynamic in August, with the Institute for Supply Management’s PMI falling to 49.1, shrinking for the first time following 35 straight months of growth. In contrast, service-sector activity stayed healthy (56.4 PMI), marking its 115th consecutive month of expansion. September PMIs for both sectors will be released this week.
One encouraging sign for the global economy: The Citi Global Economic Surprise Index turned positive late in the third quarter after lingering between -10 and -30 for most of 2019. (This index gauges the extent to which economic data releases diverge from consensus forecasts; rising index levels indicate more upside surprises.)
With just one trading day left in the third quarter, this mixed-to-down economic data has contributed to uneven results for diversified investors. On the U.S. equity front, the S&P 500 Index has gained just 1.2% during the period. Boosted by dovish remarks from the Federal Reserve, the index hit a series of record highs in July (+1.4% return for the month). But those gains were erased in August (-1.6%), as disappointing economic data from Germany and China renewed jitters over the health of the global economy. An inverted U.S. yield curve—historically a harbinger of recession—also weighed on equities. Barring a steep pullback on Monday, September 30, the S&P 500 will advance this month despite trade worries, a possible Trump impeachment and the recent attack on Saudi Arabia’s oil fields.
International equity results were mostly negative for the quarter through September 27. Based on MSCI indexes in local currency terms, developed-market shares (+1.9%) topped their emerging-market counterparts (-2.1%). Because foreign currencies weakened against the U.S. dollar, these returns were lowered to -0.7% and -4.2%, respectively, for dollar-based investors. Eurozone stocks (+2% in local terms, -1.9% in dollars) were mixed as the region’s economy decelerated during the quarter. Composite PMIs for September (51.5) hit a 6½-year low. A deepening manufacturing recession was accompanied by weaker service-sector expansion.
Meanwhile, U.S. fixed income sectors were headed for a solidly positive quarter. Patience paid off for U.S. Treasury investors (+2.4% total return for the quarter to date) willing to endure stomach-churning volatility. After closing a tranquil July at 2.02%, the yield on the bellwether 10-year note plunged 52 basis points (0.52%) in August, the biggest one-month decline since 2011. (Bond yields and prices move in opposite directions.) Fears that Trump’s trade policy would drag the U.S. into recession drove demand for safe-haven assets and sparked the rally. The quarter ended with a “September to remember” roller-coaster ride. The 10-year yield vaulted from 1.50% to 1.90% by mid-month thanks to the prospect of renewed U.S./China trade negotiations and better-than expected economic data, before falling to 1.69% on September 27.
In non-Treasury markets, investment-grade corporate bonds (+3% total return) were poised to lead the way for the quarter amid investors’ relentless hunt for yield. High-yield corporates (+1.3%) also performed well thanks to the U.S. economy’s slow, steady growth—a positive environment for the asset class.