Political Risks Rise. Why are Markets Rallying?

May 24, 2017 · Written by , , ,

Political headlines have gripped investors over the past year, including last week with the appointment by the Justice Department of a special counselor to investigate the 2016 Presidential election.

Indeed, a common question from investors is why the stock market continues to perform well in 2017 despite the Trump administrations uncertain progress on its economic agenda. After all, arent expectations for tax cuts, deregulation and stimulus the reason for stocks rallying since the election?

Our answer is to remind investors that economics and corporate earnings outweigh politics in driving financial markets. Indeed, corporate earnings have performed surprisingly well this year, rising 16% in the first quarter the fastest pace since 2011. Likewise, improving global growth is expected to boost depressed overseas earnings by 37% over the next 12 months.

Meanwhile, many so-called “Trump Trades” have reversed this year. Small cap stocks and the dollar two domestically focused trades — surged after the election, but have erased those gains in 2017 (bottom chart). This suggests that markets are attuned to political uncertainty and are reacting appropriately.

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