I am in California, which means that I woke up this morning to a market that was already open—and dropping. Washington, DC is the cause once again. Growing turmoil in the nation’s capital has called into question the ability of the Trump Administration and Congress to enact their policy goals.
From an investor’s point of view, the problem is not the turmoil, not the potential constitutional issues, and not even the ongoing tug of war between Republicans and Democrats. No, the problem is that the markets have expected significant policy action on the economy, and such action is looking less likely by the day given the many political items that need to be resolved first.
Policy actions in limbo
Let’s look at a list of things that need to be done:
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- The debt ceiling, which will need to be addressed later in the summer or early fall. This was always going to be a potentially contentious debate, and with Congress in disarray, it may be harder than ever.
- Health care reform, although alive again, is proceeding slowly. Whatever the Senate comes up with will then have be reconciled with the House bill, which will burn even more time.
- Tax reform, the real goody bag from an economic perspective, can only come once health care reform is resolved. And it will present problems of its own.
- Infrastructure spending doesn’t even show up yet on the administration’s list of policy actions.
- The deficit, apart from the debt limit, doesn’t show up explicitly in the discussion yet either. That’s a big sin of omission, and it will certainly weigh on all the other policy discussions.
Looking at today’s markets, with a substantial drop at the open, we see a clear reaction to the risk of deferred policy action. Markets don’t like uncertainty, and policy is more uncertain today than it was yesterday.
A worsening market drop on the way?
Given the uncertainty, we have to wonder whether markets will drop significantly. I suspect they won’t, absent more worrying news. Right now, from an economic standpoint, we haven’t lost anything. The economy is growing, employment remains strong, and corporate earnings are on the rise. The fundamentals, which drive markets, are also strong. What we have lost is, possibly, a modicum of future expectations—not something we have now, but something we hoped for in the future. It’s not great, but it’s not a disaster either.
What makes this drop more worrying is that markets have been remarkably calm recently. With the news from Washington full of drama, with markets dropping, and with worries high, it is easy to fall into the old mantra I mentioned the other day: “When in danger or in doubt, run in circles, scream and shout.”
Looking at the big picture, based on sound fundamentals and continuing growth, the market should remain solid, despite short-term volatility. Looking at the big picture, today’s volatility—and today’s news—is noise. Looking at the big picture, to get a bigger and sustained drawdown, we need things we don’t have: a recession, spiking interest rates, or spiking oil prices. Looking at the big picture, conditions remain quite positive.
Yes, we might see a bigger drawdown, but it is likely to be both limited and reasonably short-lived. There will be a time to worry, but right now, despite the very real issues being debated, we are still in a good place as investors.
Remain calm and carry on.
Article by Brad McMillan, Commonwealth Financial Network