In a nutshell: Investors always have a laundry list of market-related concerns, but there are typically a few dominant issues that are likely to determine investment activity and results over the coming months. In the past, our list has been as long as seven or even eight items, but in this and future editions we plan to keep it to a top three with a list of “honorable mentions”. This quarter our list includes next steps in trade policy, the soap opera that is our nation’s capital, and a very recent, but significant uptick in tension in the Middle East.
U.S. Trade Policy, Washington D.C., and Middle East Tensions: On the Horizon
There are themes, data points, and scheduled events that can reasonably be expected to impact markets. And though unanticipated events always occur, we address some of the more probable or predictable ones below. We also attempt to gauge what the market may be anticipating given that markets place their bets ahead of actual announcements or resolutions based on what the market believes the likely outcome will be. Therefore, market reaction is often more a result of how different the actual result was from investors’ predictions.
In prior editions of On the Horizon our list has often included as many as seven or eight issues for investors to be focused on. In reality, it is sometimes hard to keep the list even that short! In this and future editions, we plan to focus and provide details on a top three with a bullet point list of “honorable mentions”.
- What is next for U.S. trade policy? Over the last two years the global economy has been anxiously awaiting a resolution to the often contentious trade war between the U.S. and China. As 2019 comes to a close we finally appear on the verge of at least a partial resolution, termed Phase One, of a trade deal between the two countries. Nothing has been signed, but both parties have indicated that an agreement is in place. While many may have hoped for some sort of all encompassing, final trade deal it appears more likely that negotiations and the economic relationship between the two superpowers is likely to continue to be a fluid and evolving one. Investors may still have to get used to the idea that the trade discussions with China won’t simply end or go away, but the worst in terms of uncertainty and economic impact may be over. One question that markets have yet to ask or price in is: what or who is next? Will the current administration simply switch their trade focus to other regions it feels are taking advantage of the U.S.? If the President’s recent tariff threats toward France are any indication, trade policy issues may stay front and center.
- What is next for Washington D.C. and U.S. politics? With the President now being formally impeached by the House and with the 2020 Presidential election less than a year away, there is little question that what transpires in U.S. politics will impact markets. With regard to impeachment, it still appears very unlikely that the President will ultimately be removed from office. The Democrat-controlled House can issue articles of impeachment, but it is the Republican controlled Senate that will decide the fate of the President. As currently comprised, the Democrats don’t have nearly enough votes in the Senate to remove the President. What could have a much greater impact on investor sentiment and the economy is the fast approaching 2020 Presidential election. Rarely, if ever, has the country been more polarized politically. The investment industry has historically taken the stance that the uncertainty leading up to an election causes more market volatility and angst than the actual election results. Given the wide chasm in beliefs and plans between the two parties (regardless of who the Democratic nominee is) it doesn’t feel like a stretch to say that this election could indeed be different. There will be plenty of uncertainty and hence volatility leading up to the election, but unlike many instances in the past, the election itself may not mark the end of that volatility.
- Will tension between the U.S. and Iran continue to intensify? Tensions have existed between the two countries for decades, and intensified in May of 2018 when the U.S. formally withdrew from the Iran Nuclear deal. There had been several “dust-ups” since that withdrawal, but each conflict abated with tensions returning to prior (albeit still very high) levels. However, as we approached year-end, a potentially more serious situation began to unfold. This most recent conflict began with the killing of a U.S. contractor and wounding of American military personnel in a rocket attack on December 27th. Believing an Iran-backed militia was responsible for the attack, the U.S. carried out defensive strikes of its own in Iraq and Syria two days later. Those strikes led to angry protesters breaking into the U.S. embassy in Baghdad, with the U.S. blaming pro-Iranian paramilitary groups for that incident. President Trump vowed that Iran would be held responsible. The U.S. response came on January 3rd when the U.S. struck and killed Qassem Soleimani, Iran’s most powerful military commander, and Abu Mahdi al-Muhandis, the deputy commander of Iran-backed militias known as the Popular Mobilisation Forces, or PMF. The killing of Soleimani has unsurprisingly led to calls of revenge by the government and many of Iran’s people. Iran’s apparent retaliation came the morning of January 8th as more than a dozen ballistic missiles were launched at housing bases serving U.S. troops in Iraq. Initial reports indicate that the strikes did not result in any casualties.
It is impossible to know if or when the situation may de-escalate, but the U.S. is in the process of deploying more military personnel to the region. As of the time of this writing, the situation remains fluid and tensions high. After initially selling off on January 3, markets have stabilized and recovered. Should this conflict continue to escalate, it would likely weigh on investor sentiment and outlook.
- Federal Reserve and Interest Rates
- North Korea
- Brexit Aftermath
- Climate Change Debate
As we’ve stated before, when valuations are high and returns strong, a list of things to watch is naturally more inclined to focus on potential negatives or things that could disrupt the status quo. That doesn’t mean that there isn’t plenty to be optimistic about. Unemployment remains low, lower interest rates mean cheaper financing for business and individuals, and the exponential rate at which technology is improving and being harnessed is driving innovation and creating opportunities across the globe.
To discuss what is on our laundry list of market-related concerns, contact Brad Swinsburg, 404-874-6244.
Explore more information on the fourth quarter of 2019 by visiting these links:
Market Recap + Outlook: Fourth Quarter 2019
A Deeper Dive: Fourth Quarter 2019
Summary: Fourth Quarter 2019
Unless stated otherwise, any estimates or projections (including performance and risk) given in this presentation are intended to be forward-looking statements. Such estimates are subject to actual known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those projected. The securities described within this presentation do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in such securities was or will be profitable. Past performance does not indicate future results.