Yesterday, U.S. stocks declined 1.8 percent on news of the appointment of a Special Counsel by the Department of Justice to oversee the investigation of Russian government efforts to influence the 2016 election. Stocks rebounded today. Nevertheless, this is a clear signal that politics are impacting the markets to an increasing extent and contributing to increased market volatility.
On Wednesday, the Department of Justice appointed Robert Mueller Special Counsel to oversee the previously confirmed FBI investigation of the Russian government’s efforts to influence the 2016 U.S. presidential election. As Special Counsel, Mueller will have broad powers to look into not just Russia’s influence on the election, but related matters that come up in the course of his investigation. In the past, such investigations have uncovered significant findings while looking for other evidence. The outcome is impossible to predict, and the details of Mueller’s investigation and findings will not be known for some time.
Regardless of the outcome, Mueller’s investigation is certain to be a distraction and may further fracture a divided Republican party. Meanwhile, President Trump will need cohesive Republican support to enact his legislative agenda, which the market seemed to be counting on. All this is to say that the investigation could last months or years, hindering the administration’s ability to complete a healthcare bill, a tax bill, and other business-friendly acts. Markets have reacted with volatility as expectations for the new administration are proving to have climbed too high.
While market volatility can be unnerving, this week’s uptick only brings it up to normal historical levels. Over the past several months, we have highlighted that—while markets have performed well—volatility could surge at any time. Volatility catalysts can emanate from many areas: for example, the Federal Reserve might raise rates faster than expected, realized earnings growth could be below market expectations, or a terrorist act could rattle markets. Volatility surges can come on quickly or crescendo over time. Regardless, volatility takes time to abate as investors digest new information.
While the future is certain to bring more volatility, the underpinning of the global capital markets remains solid. The synchronized global expansion that we referenced in our April Investment Strategy continues apace. As evidence, the JP Morgan Global PMI Index is showing moderate strength. Domestically, the Atlanta Federal Reserve’s estimate of current gross domestic product growth of 4 percent is at a five-year high, and S&P 500 earnings, which disappointed in 2016, now exceed expectations at +8 percent growth versus last year.
As always, short-term market fluctuations highlight the importance and benefits of diversification. The U.S. dollar’s recent decline has contributed to the strength of international stocks; bonds have helped buffer the impact of stock market gyrations; and the low correlations of strategic opportunities have reduced volatility and added to the investment premium that accrues to those with longer-term time horizons. Of course, markets can overreact as well. If expectations fall too low while fundamentals continue to be solid, we may consider that an opportunity to increase our equity allocation.
We are long-term investors, and we believe that a sound asset allocation strategy tailored to your specific needs and a long-term view can help insulate a portfolio from market turmoil and provide confidence to maintain your investment plan.
We will be following developments closely and keep you informed. If you have questions or concerns please do not hesitate to bring them to our attention.