Market Week in Review

Are markets vulnerable to White House headlines?

On the latest edition of Market Week in Review, Senior Investment Strategist Paul Eitelman and Rob Cittadini, director, Americas institutional, discussed the potential market impacts of recent U.S. political news, the likelihood of a September interest rate increase by the U.S. Federal Reserve, and the current U.S. bull market.

Trump and markets: Could the latest news impact investors?

Political news surrounding the White House dominated headlines in the U.S. the week of Aug. 20, Eitelman said, but the impact of the recent developments on financial markets is likely to be negligible. Why? “What investors appear to really care about most are the newly-enacted tax cuts for U.S. corporations and households, recent regulatory reforms that are having the effect of streamlining business activity, and the budget agreement passed by Congress in March, which has provided a boost for discretionary fiscal spending,” he explained. All these pro-growth initiatives, said Eitelman, have been well-received by markets, as they’ve generally led to increased earnings growth and real gross domestic product (GDP) growth.

“It’s hard to see how any of the recent legal or political developments involving the Trump administration could derail financial markets—especially given that all of these recent measures have already been signed into law,” Eitelman said, adding that he and the team of strategists at Russell Investments are not expecting enough of a change in the makeup of the U.S. Congress after November’s mid-term elections for any of these laws to be reversed.

In Eitelman’s view, the higher risk to markets in the short-term is the potential threat of a trade war between the U.S. and China. Low-level discussions between the two nations the week of Aug. 20 didn’t appear to progress favorably, he said. “This means, in my opinion, that there’s certainly a risk, as we move toward early September, that the proposed threat of tariffs by the U.S. on an additional $200 billion worth of Chinese goods could potentially be implemented,” he concluded.

The Fed and interest rates: Another hike in September?

Shifting to news from the U.S. Federal Reserve (the Fed), Eitelman said that Chairman Jerome Powell’s Aug. 24 speech at the central bank’s annual Jackson Hole, Wyoming, symposium showed that the Fed believes its path of gradual interest rate increases remains the right approach. “Powell’s remarks indicate that he believes this path of gradualism is the correct middle ground for the Fed, as the central bank is weighing two competing risks in regard to rate hikes,” he said. “On the one hand, the Fed doesn’t want to raise rates too quickly and risk hurting the current economic expansion, and on the other hand, the Fed doesn’t want to go too slowly and risk the economy overheating,” Eitelman explained.

The central bank struck a similar tone in recently-released minutes from a policy meeting earlier this summer, he noted. “The minutes from the July 31-Aug. 1 meeting indicate that the Fed believes strongly in the idea of continued rate hikes in the short-term,” he said, adding that a September interest rate increase appears increasingly likely.

U.S. bull market now longest in history

On Aug. 22, the current bull market in U.S. stocks became the longest on record, Eitelman said, with the S&P 500® Index reaching its 3,453rd day without falling by more than 20%. Looking forward, however, he does see some red flags. “At Russell Investments, when we stretch out our time horizon, we believe there will be lower return expectations going forward,” Eitelman said, noting that the spread between 10-year and 2-year U.S. Treasury yields narrowed to 20 basis points the week of Aug. 20.

“While we’re not quite at the danger level yet in terms of seeing a yield curve inversion—and therefore worrying about an imminent economic collapse—we are starting to see some of the classic early warning signs creep into the picture,” he stated, emphasizing, in his mind, the increasing importance of risk management and portfolio diversification strategies.

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