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Political News and the Market

Enthusiasm around tax cuts drove U.S. stocks higher while international stocks lost ground. On Wednesday, technology and other high-momentum stocks sold off, causing some to question if this year’s high flyers can continue their run. On Friday, stocks dipped when former National Security Advisor Michael Flynn pleaded guilty to lying to the FBI about inappropriate contact with the Russian ambassador between the election and President Trump’s inauguration. Some reports also suggest Trump’s son-in-law Jared Kushner was involved in setting up the meetings. Congress moved closer to a tax bill but entered the weekend without a full agreement.

Weekly Returns:
S&P 500: 2,642 (+1.5%)
FTSE All-World ex-US: (-0.9%)
US 10 Year Treasury Yield: 2.36% (+0.02%)
Gold: $1,280 (-0.6%)
EUR/USD: $1.190 (-0.3%)

Major Events:

  • Tuesday – Buffalo Wild Wings agreed to be purchased by Arby’s for $2.9 billion.
  • Tuesday – DHL said it pre-ordered 10 of Tesla’s upcoming semi-trucks.
  • Tuesday – A regulator warned Wells Fargo it is considering additional enforcement actions after new improprieties have surfaced in auto insurance and mortgage operations.
  • Wednesday – NASDAQ said it plans to launch Bitcoin futures in 2018.
  • Wednesday – CVS was said to be moving closer to a deal to buy Aetna for around or more than $66 billion.
  • Thursday – Verizon said it would begin selling broadband internet over its wireless network to select cities in 2018, posing a threat to traditional cable companies.
  • Friday – Michael Flynn pleaded guilty to lying to FBI officers about communications with the Russian ambassador between the election and inauguration.
  • Friday – Senate Republicans said they have enough votes to pass a sweeping tax reform bill.

Our Take:
Michael Flynn, who briefly served as national security advisor for President Trump, has pleaded guilty to lying to the FBI about conversations with the Russian ambassador. He seemingly was trying to influence Russian policy before Trump was inaugurated, which is a big no-no. It has been reported that the instruction came from Jared Kushner or someone high in Trump’s team, but it is yet to be seen who knew what and when. The situation increases political risk which has ebbed and flowed since the termination of FBI Director James Comey earlier this year.

Markets will react if the situation intensifies, but we advise against trying to guess how. Even if things escalate, there is no way to know with confidence how the market would react. When Bill Clinton was impeached in 1998, markets barely budged and then continued to surge about 30% higher before the bubble finally imploded. Politics remain just one factor among many. Tax reform, Fed policy and overall valuations may be just as or more important to stock prices. We will just have to wait and see what unfolds. It will be interesting.

Separately, the tax bill seems to be getting close. Markets have been cheering for this. As mentioned above, we generally don’t believe in trying to make timing bets around political or legislative actions, but investors should not be caught off-guard if there is a “sell on the news” situation if/when the bill finally passes.

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