March 18, 2018 Tillerson/Kudlow

Risk/Reward Vol. 385

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

Cohn and Tillerson are out. Kudlow and Pompeo are in. Are Kelly and McMaster in or out? Lamb turns a red district blue. Mueller subpoenas Trump's campaign records. Uncertainty rules in DC, and as we all know, Mr. Market abhors uncertainty. Think not? Look at this week's market activity. Despite muted inflation numbers and generally good economic news, all major indices were down. Heck, the Dow Jones is virtually flat year to date. Accordingly, I continue to believe that the greatest threat to a healthy stock market is politics. How that plays out in the near term is a day to day phenomenon. Longer term, I see a Democrat landslide in November. Whether that is good or bad for the country as a general matter I leave for you to decide. I predict, however, that it will have a negative impact on the stock market. If the Democrats gain control of the House (looking ever more likely), I have no doubt that impeachment proceedings will commence. Talk about uncertainty! The fabled "Trump Bump" in stock prices will reverse, and we will see a major correction. Be prepared.

In the short run, look for news from the Fed to dominate market activity next week. The first FOMC meeting under the chairmanship of Mr. Powell takes place on Tuesday and Wednesday followed by his first news conference. A quarter point rate hike is expected. Hopefully, Powell will be more careful in his presentation than he was in his recent appearance before Congress. (See Vol 383 http://www.riskrewardblog.blogspot.com/ ). Powell's comments notwithstanding look for Mr.Market to react once the "dot plot" is published. That graph tracks each FOMC voting member's prediction of future interest rate movements. There has been some speculation that the "hawks" are desirous of four rate increases this year as opposed the three that most market watchers anticipate. Mid afternoon Wednesday should make for some interesting stock chart watching.

The subscriber conference this past week was most enlightening. Populated by "men of a certain age", laments about the sorry state of fixed income investments dominated the conversation. Since fixed income instruments (primarily bonds) are sensitive to inflation, I spent time upon my return revisiting what factors most influence inflation. Many economists believe that wage growth is the single most important factor and as such place great faith in the Phillips Curve (the alleged impact that low unemployment has upon wage growth and concomitantly upon inflation). Despite recent criticism of its application, the Phillips Curve informed much of what Fed Chairs Bernanke and Yellen believed and did. Look for what Chair Powell has to say about it if anything.

PS. For more on the Phillips Curve read John Authers' article entitled "Powell's View on Phillips Curve Will Shape Rate Debate" found in Saturday's Financial Times.