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Gridlock May Be a Good Thing
Perhaps the best news from last week is that the uncertainty around the mid-term elections has passed - that, and we don't have to watch any more political ads! The removal of uncertainty is a key reason stocks have historically done so well after midterm elections, regardless of the actual results. Getting past the election also allows investors to refocus on stock market fundamentals.
Although some votes are still being counted, we know that Republicans will control the Senate and Democrats will control the House of Representatives for the next two years of Donald Trump's presidency. While a divided government may make it tougher for the Trump administration to get some things done, Democrats are not expected to meaningfully change the path of fiscal stimulus or deregulation in 2019. Corporate profits should continue to garner support from both consumer and business spending, bolstered by tax reform.
A look at historical performance returns of the S&P 500 under different
political scenarios suggests that a Republican president with a split Congress has been one of the best combinations for US equities. On average, this scenario provides investors with 15.7% annual gains. Investors tend to like checks and balances that can take extremes out of play and maintain the status quo.
One potential positive implication is that, under a split Congress, the path to a trade agreement with China may be shorter and smoother, and the eventual deal could end up being less onerous. In fact, on Monday night, the Wall Street Journal reported that the
US and China have resumed talks on a trade deal. High-level officials from both countries - Treasury Secretary Steven Mnuchin and Chinese top trade negotiator Liu He - are attempting to lay the foundation for positive talks between Donald Trump and Xi Jinping in Buenos Aires at the end of November. A protracted trade war with China could cause an economic slowdown in the US, so any talks that could lead to an agreement is welcome news.
Editor's note: As we prepare this week's Digest, our hearts go out to our fellow Californians up and down the state, who have been impacted by the raging wildfires. The loss of life, the loss of property, the loss of clean air to breathe; these disasters have been truly devastating and our thoughts are with all the victims and their families.
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With the mid-term elections over, stocks staged a rally last week as investors appeared to welcome legislative gridlock.
Large-caps outperformed smaller caps, and for the second week in a row, value stocks outpaced growth shares. Although stocks have rallied after every midterm election since 1946, in the long run,
trends in global growth, interest rates, inflation, corporate earnings, and oil prices will have a greater effect on the stock market than any political developments.
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> Oil Prices:
A continued slide in oil prices was evident last week. Investors worried about rising oil inventories, and the price of a barrel of domestic benchmark West Texas Intermediate (WTI) crude fell into a bear market - down over 20% from a four-year high of about $76 in early October. By the end of the week, WTI had fallen back to around $60 per barrel, its lowest level in eight months.
> Producer Prices:
The Producer Price Index (PPI) is a family of indexes that measure price changes from the perspective of the seller. October's figure rose 0.6% overall (the sharpest gain in 6 years) and 0.5% percent excluding food and energy (the sharpest gain in nearly 7 years). Much of this pressure is coming from trade services which track costs at wholesalers and retailers. Energy also showed substantial pressure in October, up 2.7% percent in the month, however, that appears very likely to ease dramatically in the next report given the ongoing drop in oil.
> Budget Deficit:
According to the Congressional Budget office, the US budget deficit is expected to expand from 3.5% of GDP in 2017 to 5.1% by 2028. This will likely see US debt rise from 77% of GDP in 2017 to 96% by 2028, its highest level since World War II. These forecasts however, assume no further changes to tax and spending programs, and could be knocked off course depending on the severity of the next economic slow-down.
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An adventurer from Grantham, England has entered the Guinness Book of World Records and become the first person to swim 1,780-miles around Great Britain. Ross Edgley, 33 left the Kent town on June 1, and did not set foot on land again until November 4.
He swam up to 12 hours a day and ate more than 500 bananas. He battled strong tides and currents in cold water, braved storms, jellyfish and swimming in late autumn. The effort took its toll on his body, resulting in shoulder pain, wetsuit chafing and his tongue has partially disintegrated from salt water exposure.
Ross's mission wasn't just about pushing his own body to its limits, he hopes his efforts will also encourage others to step outside of their comfort zone: "I want to inspire people to get out there and challenge themselves - maybe try your first open water swim, sign up for a triathlon, or your first park run - find something that you didn't think you were capable of and prove yourself wrong."
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