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On the evidence of stock market futures early this morning, it looks as if traders and investors could be in for a frustrating week.
It will be frustrating, not because futures are indicating a much lower opening and suggesting that stocks could tumble this week. No, what will make it frustrating is that it is extremely likely that politics, not economics, will be driving market moves for at least a couple of days. Ultimately, though, while politics and policy inevitably affect market economic conditions and with corporate profitability are its long term drivers, this week will offer insight into both.
The temporary focus on politics is perfectly understandable. No matter how much spin Donald Trump and the Congressional Republican leaders attempt to put on it, the collapse of the health care bill last week was a major defeat and raises serious questions about the ability of this administration, maybe even of the Party as a whole, to get things done. Of course, the more cynical among the trading community may well suggest that having a White House and Congress that cannot get things done is actually a plus. In reality, though. the most likely reaction to last week’s failure is, as I pointed out last week, a rapid shift to the more unifying subject of tax cuts, and that is what the market has been eagerly anticipating since the election last November.
That should ensure that the wobble we are seeing now is fairly short lived, although some degree of “buy the rumor, sell the fact” when actual plans are revealed would come as no surprise. For now, though, simply talking about a big cut, particularly in the corporate tax rate, would give support to stocks at some point soon. As is usually the case, however, as influential as political chatter can be the longer-term trajectory of the market will be set by the reaction to actual hard data, not early morning tweets, and there is lots of news on that front this week.
On Tuesday, for example, we will get consumer confidence numbers. Most economic data is, by nature backward looking, but consumer confidence is generally a forward indicator. People who are confident in the economy are confident that they will have a steady income. People who anticipate a steady income are more apt to spend money and drive growth. This month’s index is expected to show a slight decline from February’s cycle high of 114.8, with the consensus estimate being around 113.5. That, though, is still a strong number, and if confidence stays elevated that could be enough to reverse the downward trend.
Then, on Wednesday come mortgage applications and new home sales, which are essentially other measures of consumer confidence. Mortgage applications are expected to be lower, which is hardly surprising immediately following a rate hike, but actual new home sales are forecast to have increased by 1.8% in February. Despite its use as an indicator of sentiment, though, home sales is historical data and has been unreliable recently as an indicator of anything given the bumpy recovery of the industry since the recession. I wouldn’t, therefore, expect any huge reaction to these numbers.
That is not true for Thursday’s big release, though. At 8:30 on that morning the February GDP data will be released. These numbers measure the actual growth in economic activity during February, and given that the expectation for higher growth has driven most of the “Trump Rally” they will be closely watched this month. The consensus here is for growth to remain unchanged at 2.0%. Traders and investors without a political axe to grind, however, will be parsing the GDP data, not for evidence of any Trump effect, but for how solid a base exists from which that could be launched.
Also on Thursday, corporate profits numbers will be released, and this Friday we will get Personal Income data. Obviously the amount of money that corporations and individuals have to spend and invest is significant, so don’t let any lingering political controversy overshadow these releases, either.
In general, remember that the data is all historical and policies take time to have an effect. This week’s numbers, therefore, will tell us more about the long term effects of the policies of President Obama and the last Congress than it will about our current political leaders. History suggests, however, that that won’t stop the politicians after the announcement. If the reports are good, both the Republicans and Democrats will claim credit and if they are bad each will attempt to blame the other. That is the way of politics, and it is also why investors should be ignoring it right now and concentrating on the wealth of actual, hard economic data available this week.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.