A flurry of political drama and controversy roiled the markets last week. On Wednesday, in reaction to this drama, 10-year treasuries fell 10 bps, the S&P was off by 1.8%, gold was up 1.9% and even the corporate market widened a bit. However, in the long-term we believe that markets focus on the facts, much like Sergeant Joe Friday from the series Dragnet, who is best remembered for his famous line: “Just the Facts Ma’am, Just the Facts.” Jack Webb was the original Joe Friday, but the character may be most often associated with Dan Aykroyd, who took on the part in the 1987 film.
In channeling Detective Friday, we see the facts supporting two points. First, since the economy is doing fine we may not see a long-lasting reaction to recent political news. The economy is arguably at full employment, corporate earnings are strong and U.S. GDP is moving ahead at a slow and steady pace. The rest of the world is also on an upward trajectory, with GDP in Europe and even Japan surprising to the upside. Second, the market has been discounting this political drama for some time. Both the dollar and the inflation expectations have been fading since the election, so it appears that controversy is increasingly being priced into the markets. Little of this controversy is a surprise.
Drama is always amusing and sometimes even a little worrisome. But as we have discussed before, the U.S. and worldwide economies began to reflate sometime in early to mid-2016 and the trend appears to be continuing. Despite the political drama happening, not just in the U.S., but all around the world, we will stick with Joe Friday’s advice and just focus on the facts!
Sources: Bloomberg, The Financial Times. Barclays Global Research