The market hates uncertainty. Well, perhaps not hates, but dislikes for sure.
The market climbs a wall of worry and falls down the wall of uncertainty, as we saw this week with the S&P 500 losing more than 6% earlier this month (October 2018).
There is no shortage of uncertainties on the list; to name a few:
- The Federal Reserve’s moves to raise interest rates draw criticism from the White House, while the Fed (my alma mater) justifies its rate policy by citing a stronger economy and declining unemployment. [i]
- Mid-term elections across red and blue states.
- The so-called Kavanagh effect on the elections after the contentious confirmation of the newest Supreme Court justice.
- A simmering trade war with China, as the U.S. imposes tariffs on $250 billion of Chinese imports.
- Mortgage rates nearing 5%, the highest rate in about 7 years, which could dampen the housing market. [ii]
As a rule, I don’t comment on politics and policies, at least not until they show up in the data. Even something as explicit as the new tax law, in my view, hasn’t showed up in the economy in a meaningful way yet. Until the economic data confirms it, there’s no way to link a market move to particular policy.
We recall that Trump’s election coincided with a rally. At face value, a connection could be made between the two. But there was also a clear fundamental argument that the so-called “Trump rally” occurred because the economic data supported a move in that direction.
This is not a comment on the political climate or the policies of one administration versus another. Given the prevailing economic trends, I believe there would have been a rally no matter who won the election. Of course, we will never know for sure.
Amid great uncertainty, there is comfort and wisdom in turning to what we do know: the real-time economic data. At Astor, our macroeconomic approach looks at the current fundamentals as captured and aggregated by our proprietary Astor Economic Index® (AEI).
As it has for many months and quarters, the AEI shows that the U.S. economy is growing at a pace that is supportive of appreciation of equity assets (i.e., stocks). As we’ve noted, the AEI is still showing strong growth.[iii]
Stocks, however, don’t go up in a straight line. In our view, a flat or even a down year could be consistent with market performance during this overall expansion.
That said, given where the AEI and the economic data are currently, I believe there is more upside before this expansion is over.
All information contained herein is for informational purposes only. This is not a solicitation to oﬀer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its aﬃliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information.
The Astor Economic Index® is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points: including output and employment indicators. The Astor Economic Index® is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data.
[i] N.Timiraos, Fed Officials See Strong Economy Justifying Interest Rate Rises, The Wall Street Journal, Oct. 11, 2018, The Wall Street Journal, https://www.wsj.com/articles/fed-officials-see-strong-economy-justifying-interest-rate-rises-1539291453
[ii] L. Kusisto and C. Rexrode, Mortgage Rates Fast Approaching 5%, a Fresh Blow to Housing Market, Oct. 11, 2018, The Wall Street Journal, https://www.wsj.com/articles/mortgage-rates-fast-approaching-5-a-fresh-blow-to-housing-market-1539266400
[iii] J. Eckstein, “October Update on the U.S. Economy,” Astor Blog, Oct. 11, 2018, https://astorim.com/october-update-on-the-us-economy/