No more special counsel indictments plus a friendlier Fed will shift the electoral math. Otherwise, investors can now look forward to a few more years of the status quo.
By now you probably know that the “Mueller Report” is complete and the Justice Department summary recommends no new legal action. The evidence was inconclusive.
But the real story last week revolved around the yield curve, which continued to invert as the Federal Reserve effectively admitted that interest rates have gone too far.
President Trump has a plan for the Fed that involves appointing noted central bank critic Stephen Moore to the board of directors.
If confirmed, he’s only going to have one vote. But he’s going to argue loudly for lower rates between now and the next election.
Low rates stimulate growth. A growing economy favors the incumbent. The math there isn’t hard.
Between Mueller and Moore, 2020 looks like a much easier win for Trump. The question, as always, is what that means for investors and their advisors.
Lower legal risk, fewer barriers
Before last week, the biggest threats to the reelection effort were always the prospect that the economy would curdle or the maelstrom of investigations into Trump’s business would turn into a scandal with teeth.
Now the main engine of investigation has stopped. Mueller quit without making any additional criminal recommendations. No sign of “collusion.”
Congress is roiling and state prosecutors are still digging. But with Trump personally off the hook, the cloud over his administration has moved on.
That’s going to play a whole lot better with voters than the alternative.
Until now, there was a significant risk — maybe not a huge one, but bigger than zero — that Mueller complications would force a resignation, impeachment or worse.
While he isn’t completely in the legal clear yet, resolving the threat from that direction gives him more room to really chase reelection, knowing that he’ll make it through the first term first.
And that shifts the primary battlefield back to the economy. Trump raises his political profile if he skirts a recession in the next 20 months.
He hits the rocks if the Treasury curve does indeed signal a slowdown in that time window. The economy is his signature achievement. If it unravels, so does he.
Which brings us to Stephen Moore and the Fed.
Growth is good (because) growth works
Moore is a discipline of the gospel of growth. He loves an expanding economy above just about anything else.
That makes him a pariah to many more mainstream economists. I’m not really going to get in the middle of their debates.
For our purposes, the point of getting him on the Fed is to achieve growth at any cost. Keep the economy hot. Keep voters working and consumer confidence high.
Do whatever it takes to stave off recession no matter what the yield curve says and Trump has the home court advantage in 2020 as far as the economy goes.
Maybe that means interest rates go down instead of simply freezing here as Fed Chair Jay Powell currently expects. Moore has argued that the Fed has already gone too far.
Fill the Fed’s other vacant chair with a similar voice and it doesn’t matter what happens with inflation. If prices start spiraling, it’s someone else’s problem.
Right now I have to say the yield curve doesn’t get any better until the short end comes down at least one 0.25% step, and taking back two rate hikes would probably feel a lot more comfortable.
Otherwise, the long end isn’t going to come up on its own unless the Fed dumps its Treasury bonds. That’s not going to happen without someone like Moore pounding the table.
Moore hated quantitative easing as well as the tightening that’s now supporting the long end of the curve. He doesn’t believe in any of that kind of thing.
Again, he’s only one vote. But in a panel as tightly wound around consensus as FOMC, one extreme outlier moves the bar a long way.
He could argue himself blue over the next two years and get nothing. On the other hand, he might book a few little wins here and there and guide rates just a little away from “neutral” and toward stimulus.
Either way, there’s a firm “no” guaranteed on every rate hike vote he gets to sit in on. Wall Street can count on that if and when he gets confirmed.
And Powell’s position looks a little less secure. His term as chair is theoretically up in 2022, at which point we’ll simply have to see where we all stand.
The investment perspective
A White House free and able to do whatever it takes to keep the economy from stalling means stocks have room to punch through last year’s records.
Stimulus will flow into corporate income statements and get earnings growth moving again. It might not be as robust as what we saw last year in the wake of tax reform, but it’s still better than the drag Wall Street currently expects.
Smart stimulus will come from a grand bargain on infrastructure at last or some other program that can get through a divided Congress with a minimum of strain.
But one way or another you can bet stimulus is coming in the next two years.
The banks will keep starving. Sad to say, they’re used to it, but their pain and distraction is a competitive edge for independent advisors who don’t have a huge rate-dependent institution calling the shots.
Inflation can easily become a threat as we approach 2020. Wage inflation is actually not bad. When people feel prosperous they spend more and ultimately have more to invest.
Those who need to protect their purchasing power can benefit from inflation hedges. You know the playbook there: commodities, TIPs, real estate.
If stocks get a shot in the arm, the hedge is all your clients should need to do a lot better in the next two years than they would’ve in a recession.
And either way, remember, stocks generally rally 15% in the year after the curve inverts. The problems emerge beyond that point.
Would your clients trade two good years for renewed uncertainty beyond 2020? It depends on how much they make now and what their long-term plan looks like.
I have to say the future was always uncertain so they’re really not giving much up. Life is change.
Meanwhile, the uncertainty around Mueller and the presidency has evaporated. It may not be “business as usual" from here but even incremental clarity is nice.
