Is investing a science or an art? It certainly has some scientific elements, from discounting future cash flows and measuring volatility to determining downside risk. And there are myriad qualitative aspects as well, from gauging the prospects of a new business strategy to understanding the potential impact of litigation. Investing today seems to have become more of an art than a science as the markets are increasingly driven by headlines, twisting and turning on the ebb and flow of news on trade negotiations and tariff imposition as well as the prospect of future Fed cuts.
Most recently, political winds are buffeting US large caps. According to PredictIt, an online futures market of political outcomes, the likelihood of impeachment of President Trump has risen markedly to 72 per cent from the 21 per cent probability calculated at this time last month. Given the President’s focus on the economy and markets, investors are concerned that his removal would usher in the Democratic contender, who according to PredictIt would be Elizabeth Warren. Political futures market participants believe that Warren has a 52 per cent chance of securing the Democratic presidential nomination. Joe Biden is currently situated at 21 per cent.
Candidate Warren hasn’t been shy about voicing her desire to break up large banks and other dominant corporate players, particularly the tech behemoths, which is causing unease among some business leaders and investors. It was revealed last week via a leaked recording from an internal Facebook meeting that CEO Mark Zuckerberg is taking the Warren “existential threat” seriously, and bracing for the likelihood of legal action against the company should she be elected. Investors are beginning to weigh the possible impact of prospective nominee Warren’s policies as well: the S&P 500 is off about 1.5 per cent since the whistleblower news first broke and cast more uncertainty around President Trump’s re-electability.
We believe investors will refocus their attention on fundamentals when Q3/19 earnings season begins next week. Analysts are forecasting a 3.6 per cent year-over-year earnings decline for S&P 500 companies, with tech profits off by more than 10 per cent. We expect the market to largely take its cues from earnings results – and, more important, management guidance – over the next few weeks. Meanwhile, however, the rapidly unfolding impeachment story will still be making distracting headlines. While Cresset constantly monitors the headlines and their impact on the markets, we are fundamentals-driven, long-term investors who keep the noise in perspective.