Meteorological & Political Hurricane Season

The release of last week’s economic data did little to upset the established trends equity market investors have been the beneficiary’s of for nearly two years. The PPI-FD, released on Wednesday by the Bureau of Labor Statistics, is a good case in point. For August, the PPI-FD was negative at -0.1% following July’s flat (0.0%) results. On a year-over-year basis the results for August were also lower than they had been in July; 2.8% versus 3.3%. The net effect of this speaks to relatively healthy levels of inflation on a year-over-year basis – despite an economy that is accelerating. As if to independently confirm this thesis, the Atlanta Fed Business Inflation Expectations gauge for September, also released Wednesday, was a tame 2.2% versus August’s 2.1%.

Additionally, the Consumer Price Index (CPI) reading for August, released Thursday, was 0.2%, below Econoday consensus of 0.3% and unchanged from July. Well managed in-channel inflation combined with accelerating economic expansion, the details of which we have outlined in recent notes, provide for a very constructive forward-looking landscape for equity investors. That landscape acts to support expectations for additional EPS expansion and revenue growth on of the part of S&P 500 companies in coming quarters, which we have also discussed in recent notes.

Potential political disruption to trend:

Given that backdrop, the natural question for investors to ask is “What is most likely to derail these trends in the near term?” Other than an unexpectedly disappointing Q3 earnings season, there is a potential disruptive thread that stands out.

We are roughly eight weeks away from mid-term elections here in the United States. Without question, that political variable represents the most obvious potential risk to US equity market trends. It is no secret that both U.S. equity markets and the U.S. economy have posted acceleratingly positive results since the Presidential election results of 2016. It may not be politically palatable for some, but that data speaks for itself.

If, as I believe, the dramatic run higher in equity prices and accelerating economic expansion are at least in part due to the policies of President Trump and a compliant GOP controlled Congress, any shift in that paradigm may well result in a change of investor perception. It may be more of a function of perception than reality. That said, perception matters and in this case a great deal.

As the Real Clear polling figures and graphs below suggest, The GOP may lose control of the House in the upcoming mid-terms. The generic poll indicates that the Democrat Party has a lead of 8.3 over the GOP. In the event the GOP loses control of the House, it is widely expected to lead to a Democrat Party effort to impeach President Trump – though the specifics are not clear. In the Senate, the GOP is expected to retain control, possibly pick up a seat. Though less directly impactful, the Real Clear data also suggests that the Democrat Party may well pick up four governorships reversing a 10-year trend.



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Even if the GOP loses control of the House in the Midterms, I do not expect that to have an immediate impact on either corporate results or economic performance. It is more a function of perception than reality. It is perception after all that has pushed small business confidence to record highs and consumer confidence and consumer sentiment to cycle highs among other factors.

This Week:

This week’s economic calendar is relatively light and theme less other than the fact that quadruple witching is Friday. Data releases that will garner the most attention include Wednesday’s release of Housing Starts by the — and the weekly EIA Petroleum Status Report. On Thursday expect Weekly Jobless Claims, Philadelphia Fed Business Outlook Survey and Existing Home Sales to garner the lion’s share of investor attention.

Q2 earnings season is winding down, but that doesn’t mean there aren’t bellwether quarterly results on tap this week. FedEx (FDX) and Oracle (ORCL) are due to release results today. FDX’s consensus EPS forecast, according to the Nasdaq Earnings Calendar, is $3.78 versus a year ago $2.51. Oracle is expected to post EPS of $0.61 versus a year ago $0.55. On Tuesday, AutoZone (AZO) and General Mills (GIS) report. Consensus EPS for AZO is $0.80 versus last year’s EPS of $0.75. GIS’s consensus EPS is $0.63 versus last year’s $0.71. Open source leader Red Hat (RHT) has a consensus EPS forecast of $0.59 – inline with last year’s $0.58. Micron Technology reports on Thursday. The consensus EPS forecast is $3.26 versus last year’s $1.99. No corporate results are scheduled for Friday, quadruple witching.

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Flickr photo: NASA Johnson