As we close this quarter, investors are having a hard time deciding what the stock market’s next move will be. Since the future appears murky right now, equities are trapped in a tight trading range. Will we break out? And, if so, in which direction?
For the bulls, we are tantalizingly close to breaking out to all-time highs, but every time we do, something happens to spoil the parade. The bears, on the other hand, believe the markets are fraught with risk and should be sold. Both sides have a good case, but that decision is going to be made elsewhere, specifically, in Washington, D.C.
You would have to be marooned on a desert island not to know the events that have transpired this week in the political arena. From the speeches and meetings early in the week, to the bombshell announcement by the Democrats of a presidential impeachment inquiry, one could accurately describe the week’s events as tumultuous.
However, in this debate, I am going to side with the bulls simply because of how well the markets held up under the news. Make no mistake, the threat of impeachment is real and here to stay and, in my opinion, will be with us through the 2020 election. Like the Mueller report, it will take on a life of its own, spreading out and around looking for dirt. And in Washington, it is not difficult to find dirt, especially in a swamp.
Look for the controversy to impact the trade talks. Why would the Chinese want to cut a deal with a president under the cloud of an impeachment inquiry? Why not wait and let the Democrats do the work of undermining Trump’s standing and authority? Of course, they could get a deal on their terms, if Trump feels exceptionally vulnerable.
Impeachment is yet another blow to expectations that a trade deal will happen anytime soon. As a result, despite economic data to the contrary, the bears will be expecting our economy to falter further. Talk of "Recession 2020" will once again gather momentum. That will lead to rising expectations that the Federal Reserve Bank will need to save our faltering economy and the stock market with more interest rates cuts. You see where this is going?
I wonder sometimes, if we couldn’t actually talk ourselves into a recession. It seems that on all fronts, there is indecision. Investors are divided on the prospect of recession, on a trade deal, on whether the Fed will cut rates again in October or maybe December. Is it any wonder that the markets are locked in this trading range with so many unanswered questions?
If we now throw in the circus of impeachment, is there any chance that we can carry on and push stocks higher?
Well, yes, actually, there is. Have I not just described one humongous “Wall of Worry”? And what happens to stocks in that kind of environment — against all odds, equities usually climb higher.
We could get a trade deal, simply not the deal Trump wants, but one that is good enough for government work. The Fed could back-stop the economy again with one more rate cut, which, in my opinion, would be more than enough to satisfy everyone, at least into next year.
As for impeachment, I have enough faith (may be a poor choice of words) that Trump is adept at covering his bupkis in just about any circumstance from paying off prostitutes to obstructing justice. Why should something as nebulous as an impeachment inquiry slow Donny down?
Now that we are heading into October, be prepared for some volatility. It is a notoriously bad month for stocks, although not always. If the markets get tripped up on any of the above concerns, look through them. This too shall pass. Stay positive and stay invested.
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $400 million for investors in the Berkshires. Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
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