by Connor Darrell CFA, Assistant Vice President – Head of Investments
Global equity markets generated solid gains last week despite a selloff on Friday. Friday’s volatility was sparked by a stronger than expected jobs report, which showed wages increased at the highest rate since 2009 and stoked concerns of higher inflation and an acceleration of rate hikes. Bonds also sold off as yields crept higher on the news.
Markets continue to be sensitive to any data that suggests further interest rate hikes may be warranted, but overall, the health of the U.S. economy and the robustness of corporate earnings should continue to drive returns.
Where Do We Go from Here?
U.S. stocks sold off to the tune of about 7% in October, primarily as a result of rising interest rates, moderating global economic growth, and ongoing geopolitical uncertainties. As we discussed last week, part of the uncertainty permeating through markets from a geopolitical perspective is directly related to the mid-term elections. Of course, after Tuesday’s election results are finalized, any questions that markets may have about the composition of the U.S. legislative branch will be answered. Most analyses we have reviewed suggest that the Republicans have about an 80% chance of keeping control of the Senate, but that Democrats have a similar probability of taking control the House of Representatives. Ultimately, even if Democrats manage to gain control of both the Senate and the House, it is unlikely there will be any meaningful changes to federal policy. Most of the President’s policies have been enacted via executive order, and he will still maintain his veto power.
The one lingering concern will likely be the ultimate conclusion of the Mueller investigation and whether Democrats attempt to move forward with an attempt at impeachment. For obvious reasons, it is likely that markets would not react positively to such a development, but there are two reasons that we believe there is no cause for major worry at this time. First, this is likely to be a 2019 problem, rather than a 2018 one. Secondly, no matter what ultimately transpires, the markets are far more concerned about the economy and corporate earnings power than they are about disorder in Washington D.C. For now, investors will be looking to the upcoming holiday season for some relief from the recent volatility. U.S. Consumer Confidence is at an 18-year high, and if that confidence translates into spending, then markets could find good reason for festive cheer.