- Holding Steady. Though nerves were no doubt rattled, the equity markets nonetheless shown incredible resilience in a period that was marred by perhaps the costliest hurricane in U.S. history, acts of intimidation from a Far Eastern rogue nation, and a political climate that is every bit as unsettling.
- Impact of Harvey. With hundreds of thousands of homes flooded, and more than 30,000 people displaced in eastern Texas, Hurricane Harvey is one of the most devastating natural disaster in U.S. history. Roughly 20% of U.S. refining capacity has been knocked out, and economic losses are preliminarily estimated at $70 – $190 billion. Recovery efforts are underway, and we expect that, not unlike past natural disasters, Harvey’s long-term impact on stocks to be minimal.
- Fire and Fury. Tensions escalated between the U.S. and North Korea, as the leaders of both countries ratcheted up the rhetoric. North Korea has conducted several nuclear tests in recent weeks, although they have so far steered clear of antagonizing the U.S. by launching missiles at Guam as threatened. The situation remains quite fluid, although we believe the market is not telegraphing the message of an impending war.
- Back to School Congress returns to Washington after their summer recess, and they have a busy period ahead of them. High up on their “to-do” list is the need to pass a debt ceiling hike, continuing resolution, and the funding for Harvey’s recovery. After the defeat in repealing the Affordable Care Act, political focus has shifted towards tax reform, although the Republicans are still a long way from producing a politically viable tax plan.
- Weak Dollar. After a strong two-year rally in the U.S. dollar, the world’s reserve currency has pulled back rather significantly this year, and is currently trading at multi-year lows relative to several other major currencies. Political instability, as well as the improving economies overseas, have contributed to the weakness. With over 40% of S&P 500 companies’ sales coming from overseas, a weak dollar can be beneficial to the market, although we are also cautious on the negative impact a reversal in strength can have in the often fickle-minded FX market.
- Reasons for Optimism. Geopolitics and political drama is dictating some of the short-term moves in equities, but it is the economy that shapes long-term trends. We think markets around the globe can grind higher, supported by the continued “green shoots” of growth overseas, and with low interest rates everywhere. Valuations are leaning on the higher side, but we believe they can be sustained, and even climb further, especially if corporate profits and earnings continue to rise.