Brad Weafer, CFA, Chief Investment Officer

 

The week started off well for equity markets. The S&P 500 index was up 0.5% on Monday, closing at records highs over 2400. Tuesday started off strong as well, notching intraday highs in early trade. Confounding many skeptics, the market has been very resilient in the face of a string of controversial stories related to the new administration. Volatility essentially has been absent, leaving markets to grind higher. By the close on Tuesday, investors enjoyed a near 14% total return in the S&P 500 since the election. 

Unfortunately, the placid markets were disturbed by news out of Washington Tuesday night.  The New York Times reported that recently fired FBI director Comey drafted a memo detailing a conversation with President Trump, in which the President inferred he wanted the Director to shut down the federal investigation into former national security adviser, Michael T. Flynn.  According to the Times, “It was part of a paper trail Mr. Comey created documenting what he perceived as the president’s improper efforts to influence a continuing investigation.”  The stock market had a negative response, with the S&P 500 falling 1.8% on Wednesday.  What a difference 24 hours make! 

Policy analysts we use as a resource have been quick to point out that several recent, potentially damaging stories based on anonymous sources have been proven as false.  Taking the Times story at face value without further confirmation would be a mistake at this point.  Furthermore, the Senate Intelligence Committee Chairman confirmed they have no evidence of obstruction from the White House.  Going forward, however, actual testimony from former Director Comey confirming the conversation would change the politics.  Thus far, he has remained silent, declining to respond to the Times.  The White House has publicly denied the allegation.  Additionally, last night former FBI director Mueller was named special counsel to oversee the investigation into ties between President Trump’s campaign and Russian officials.  This raises the specter of further attention on interactions between the President and director Comey.

For the better part of the last year we have been reiterating the same message: don’t panic in the face of political fears and stick to long-term investing plans.  While yesterday’s action was certainly disconcerting, the market is only 2% off of all-time highs and is still up over 6% year to date.  While stocks were down, bonds rallied, providing support for returns of balanced portfolios and highlighting their value in reducing risk.  Our attention remains focused on the real factors that drive stock prices, namely corporate profits.  If the activities in Washington delay the policy agenda, an upside scenario where tax reform boosts earnings growth would be at risk.  However, even absent tax reform, corporate profit growth has accelerated the last two quarters following a weak 2016.  Better economic activity, at home and abroad, have helped bring the first quarter of 2017 earnings growth for the S&P 500 to over 13%.  We are comforted by the expanding economy and healthy corporate profits as a buffer against increased uncertainty in the political sphere.

We are tracking the situation closely and will update on any material news.  Our advice today remains the same: stay focused on fundamentals and don’t let headlines veer you off course from your long-term investing plan.

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