Reality Check for Investors

Virtually all the enthusiasm that greeted President Trump’s victory in Q4 has been exhausted. The euphoria that defined our equity market performance into year end has run head on into a brick wall. We are in the midst of a reality check that is being fueled by investor realization that campaign promises are an entirely different thing than legislative accomplishments. Given that the opposition party in Washington has made it clear that it will fight every Trump initiative and that the GOP establishment seems relatively ineffective at marshaling a unified majority to support the president–we could be in for a protracted period of legislative paralysis and equity pricing stagnation.

With that reality as a backdrop, investors this week will focus on the FOMC minutes, our most recent economic data and corporate results. The FOMC minutes from the last meeting are widely expected to provided little in the way of surprises. Markets have priced in a 78% likelihood we will see an interest rate hike of 25 bps by the Fed in June.

Last week’s expected US equity market pricing weakness was triggered by several themes, not the least of which is the continuing and dramatic dysfunction that epitomizes the state of affairs in the nation’s capital. Increasingly, investors are pricing in yet more stagnation on the policy front and doubts about tax reform as evidenced by our continued drift lower in pricing.

As I suggested here last week: “Broadly speaking, the S&P 500’s close last Friday at 2390.90 left the index still above its 50 and 200 DMA but susceptible to a trade lower – particularly in light of our stretched valuations, slowing volume, historically low volatility and a recent stall in price appreciation.”

From my commentary on

Given that the FOMC Minutes are not expected to provide any surprises and that existing home sales are likely to remain constructively in channel plus the fact that OPEC is meeting on Thursday, the EIA Petroleum Status Report will capture investors attention–particularly in the energy sector. Last week’s EIA report reflected a fairly stable market even though we did see modest inventory draws across the report. Durable goods and GDP round out the week on Friday. As far as Q1 GDP is concerned, lets face it, the results were underwhelming. However, my sense is that we will see meaningful acceleration GDP expansion in Q2, potentially in the 2.4-3.0 range. That type of Q/Q acceleration would certainly dovetail nicely with the FOMC’s expectations for rates.