Weighing The Week Ahead: Can Markets Continue To Shrug Off Political Turmoil?

Summary

• Economic news, especially employment, remains strong.
• Threatened tariffs seem to have some wiggle room for negotiating with allies.
• Corporate earnings remain strong.
• "Headline risks" pile up, but investors seem not to care.
• Quantifying risks - and separating the speculative from the tangible - is the key for investors.

The economic calendar is normal with emphasis on inflation data and housing news. These routine reports continue in the background as the Washington headlines continue. We would all like to focus on markets, but the daily news flow emphasizes the turmoil. Many people are asking:

How can markets ignore the political turmoil?

Last Week Recap

My last edition of WTWA, I expected a focus on whether the US would launch a trade war. I also suggested that the original Administration tariff threats might well be eased in the face of complaints from allies, both at home and abroad. Both proved correct, helping us to maintain our stock positions.

The Story in One Chart

I always start my personal review of the week by looking at a great chart. The Investing.com version of the S&P futures shows the action while the stock market is closed. The interactive version also lets you specify your choice of both time and intervals. Finally, there is a tag for significant news at various key points.

The gain this week included a 3.5% trading range, a bit lower than recent volatility. I summarize actual and implied volatility each week in the Indicator Snapshot.

Personal Note

I am enjoying my vacation, but sharing a few thoughts this weekend. If possible, I’ll update the indicators next week as well.

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

The economic news was very good. ISM services and the jobs numbers – both ADP and BLS – were excellent. The economic strength continues, but with less apparent pressure on wages. Everyone loved this employment report (Bloomberg) including the best source, Bob Dieli:

Establishment Survey:

Strong on strong. Good internals.

Wage growth still less than stellar. Expect more comment on this in the weeks ahead both from me and the punditry.

This is what a jobs report is supposed to look like in an expansion.

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.

The Calendar

We have a normal economic calendar with an emphasis on inflation data. Since I expect little concern on that front, I am more interested in housing starts, building permits, and retail sales.

Like it or not, the Washington circus may well dominate the news – once again.

Briefing.com has a good U.S. economic calendar for the week (and many other good features which I monitor each day). Here are the main U.S. releases.

Next Week’s Theme

The economic calendar is normal. The continuing market strength in the face of unsettling headline news has the pundits wondering. They will be asking:

Why are financial markets ignoring the ongoing political turmoil?

Abnormal Returns takes up the issue, Politics is no Longer the Third Rail for Corporate America. Tadas cites some great sources, especially Ben White in Politico.

This is all easier for investors if they accept my recommended distinction, the difference between policy analysis and politics.

I often emphasize that people should separate their investment decisions from their political viewpoints. Deciding to sell all your stocks because you do not like an election result is a costly investment mistake. It is important to understand current public policy whether you agree with it or not. President George W. Bush’s tax cuts, President Obama’s Affordable Care Act, and President Trump’s tax policy changes are all good examples. You should not judge policy based upon whether you agree with the decision. Those who objected to the distributive effects of GOP tax cuts could do so as citizens but should not have ignored the economic effects. Whether or not they liked Obamacare, astute investors joined me in buying health insurance stocks.

That is what it means to separate investing and politics. In the last year, this distinction has become more difficult to make. Merely mentioning the name of the President seems to bring an end to careful analysis. That is not effective. Making good investments does not mean you must ignore hot-button issues. Estimating the chances for increased gun control, for example, is a subject for objective analysis. If your analysis is accurate, you may find some stocks to buy or to sell. Your personal policy preference is irrelevant to your investment decision.

This type of analysis can help us deal with the array of current challenges.

• Korean situation
• Russia – nuclear threat and diplomacy
• Russia – election meddling
• Administration personnel changes
• Trade issues
• Investigations and litigation of all flavors

As usual, I’ll suggest my own interpretations in today’s Final Thought.

Quant Corner

We follow some regular featured sources and the best other quant news from the week.

Risk Analysis

I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot

The indicator snapshot should be helpful in staying the course – not panicking because of some scary headlines. We continue to monitor the technical health measures on a daily basis.

The long-term fundamentals and outlook have been unchanged through the recent bout of volatility.

The Featured Sources:

Bob Dieli: Business cycle analysis via the “C Score.

RecessionAlert: Strong quantitative indicators for both economic and market analysis.

Brian Gilmartin: All things earnings, for the overall market as well as many individual companies.

Doug Short: Regular updating of an array of indicators. Great charts and analysis.

Georg Vrba: Business cycle indicator and market timing tools. None of Georg’s indicators signal recession. His business cycle index, which we use in the Indicator Snapshot, is no longer “on the peg” at 100, but does not indicate a recession.

Insight for Traders

Our discussion of trading ideas has moved to the weekly Stock Exchange post. The coverage is bigger and better than ever. We combine links to trading articles, topical themes, and ideas from our trading models. Each week we explore a topic of current interest, drawing upon trading experts. This week we asked, “How do you handle a losing streak?" We also described how our trading models react, and updated the ratings lists for Felix and Oscar, this week featuring the Russell 1000. Blue Harbinger has taken the lead role on this post, using information both from me and from the models. He is doing a great job, presenting a wealth of new ideas and information each week.

While my intent is to focus on traders, long-term investors may benefit from a better understanding of what the issues are for traders.

Insight for Investors

Investors should have a long-term horizon. They can often exploit trading volatility! I remind investors of this each week, but now is the time to pay attention.

Best of the Week

If I had to pick a single most important source for investors to read this week, it would be Adam Shell’s explanation of how the bull market could last another twenty years! Citing some leading sources, he notes the strength of current trends and the absence of traditional threats.

This is a rare attempt to demonstrate the “upside risk” taken by those making simplistic conclusions based upon the age of the bull market.

Final Thoughts

An important rule for investors is to focus on fundamentals. This does not mean the unquantifiable and speculative headlines. There is always a list of things to worry about.

Stock fundamentals involve the following:

Earnings expectations: Excellent

Absence of a recession threat: Supported by many sources, including our best

Relative attractiveness of stocks compared to other investment choices: A continuing big advantage

When quantifiable fundamental analysis meets these tests, the market outlook is positive.

[Do the economic challenges seem complicated and threatening? You might find help in my paper on the top investor pitfalls, or my suggestions about managing risk. Just write for our free information on these topics. While they describe what I am doing, the do-it-yourself investor can apply the same principles. These are available for free from main at newarc dot com].

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.