Investors got two out of three wishes this past week, as a trade deal was finally struck with the Chinese and the U.K. gave Boris Johnson an overwhelming mandate for Brexit. The remaining open sore for investors is the impeachment of Donald Trump, although that cloud is likely to be lifted by February. With so much distracting news disappearing from the daily headlines, investors may soon have no choice but to refocus on the economy, which will be a positive development.
Investors have been reacting, sometimes sharply, to every single twist and turn in the negotiation between the U.S. and China over trade practices, sometimes multiple times in each direction within the span of a single week. The talks left investors uncertain and highly distracted, which is never good for stock prices. So the deal helps calm nerves. It almost doesn’t matter that the underlying causes of the trade conflict were not resolved. No one thought China would agree to stop trying to steal U.S. intellectual property, especially in computer tech, or in trying to favor its own companies at the expense of foreign ones. Those are battles for another day and are best fought out of the glare of the media. For now, the risk of a large scale trade war is behind us and peace reigns.
Investors were also exasperated and exhausted by the battle within the U.K. to gain approval for Brexit. Who could implement investment plans without understanding how or whether the U.K. would exit the E.U.? And what if Jeremy Corbyn might win and nationalize the utilities and assorted other businesses he wanted to control, while boosting tax rates on the rich to pay their fair share? No doubt, the U.K. would have suffered a massive flight of the wealthy and capital, and hemorrhaged jobs if Corbyn had won. Many U.K. citizens harbor doubts about Boris Johnson, but they had few doubts about where Corbyn stood and voted accordingly, resolving a great concern among investors on both sides of the Atlantic.
Resolution of these issues leaves only the Trump impeachment to fill the news flow, a very safe bet. How long will it take before Americans tire of being subjected to this highly political show? In any case, Democrats do not want this issue to linger and begin encroaching on the upcoming primaries and election campaign, so they will push the process along, which implies that the impeachment process will likely run its course fairly quickly. The election campaign will fill the news void. But investors will also be able to refocus on the ongoing economic expansion, now in its 11th year with no signs faltering, and the ongoing rise in corporate profits.
The Fed has the ability to undermine consumer or business confidence, but Chairman Powell has set a fairly high hurdle before he’d be willing to resume raising interest rates. He stated he wants to see inflation above the Fed’s 2% target for a sustained period of time. That can be translated into English by saying he doesn’t want to raise rates before the election and establish the Fed as a target for competing politicians. So we see continuing economic growth around 2% in 2020, eroding unemployment to new cycle lows, and rising corporate profits as setting the stage for another positive year for stocks, but with far less drama. Boredom may induce us to remember the chaos of 2019 fondly.