The winner of the Iowa caucuses was certainly President Trump. Obtuseness aside, the out-of-the-gate stumble by the Democratic Party’s vote tally debacle and the lack of a clear front-runner have afforded the sitting president a favorable set of outcomes from his opponents’ first, and most-visible, contest.
Despite the title of this post, the link between politics and capital market performance is tenuous at best. Certainly over the long-term, economic fundamentals like employment, productivity, income growth, monetary policy and inflation matter far more than who occupies the White House. But so many of the current President’s policies have recently shown to be market-relevant (think tax cuts, trade policy, and others) that this contest is shaping up to be uniquely impactful. That is to say, we’re not done with politics yet and probably won’t be until well after the November election.
In addition to all the political goings-on, markets were treated to a payrolls report that blew out expectations by a wide margin. That matters a lot, because continued strength in the labor market is keeping consumer confidence – and therefore consumer spending – elevated. I’d like to believe that this had as much (or more) to do with the equity markets’ strong performance last week as did politics.
Reports on the health of the services sector were also better than expected, with both the Institute of Supply Management’s ISM-non-manufacturing and Markit Economics’ Purchasing Managers’ Index (or “PMI”), coming in ahead of estimates. While encouraging, the two reports sent mixed signals with regard to hiring, and like their manufacturing-based companion indices last week, were more consistent with weak- to moderate expansion than robust growth. Commenting on the PMI, economists at Markit mentioned that “factory activity remains worryingly subdued, and optimism… continues to run at one of the lowest levels seen over the past decade.”
Also absent from January’s ISM and PMI numbers was any obvious impact from the Wuhan coronavirus. There, the news is also somewhat mixed: more than 40,000 cases have now been confirmed, and the death toll has now surpassed the SARS epidemic of 2003. Governments continued to take fairly aggressive action to contain the spread of the disease, including a number of easing moves by China to neutralize its economic impacts. Coronavirus remains a legitimate concern for markets, not least because the economic narrative is somewhat unclear and equity market valuations are elevated, meaning market sentiment may be unusually vulnerable to any negative economic impacts the outbreak might create. Like politics, the impact of the coronavirus is likely to remain a topic of discussion in these pages for at least a little while longer.