Authored by Nicholas Colas via DataTrekResearch.com,
After telling you all about the fire in my apartment building last night, today’s note will be a little less heavy…
Three things to discuss with you:
#1. Online prediction market odds for an impeachment of President Trump in his first term.
We try to stay out of the political world as much as possible; our job is to help you invest wisely and make money. Period. We break with that guideline only when there is something we think you should consider and then back it up with market-based data.
We’ve recently reviewed with you the possibility that the Democrats will retake the House and Speaker Ryan’s retirement announcement today only makes that more likely.
There’s a long way to go before Election Day, but in the interest of bringing up important investment thoughts “too early” (versus too late) we have to think about the possibility that a Democrat – controlled House would move articles of impeachment. Whether you (or we) think that’s a bad idea or not isn’t really relevant. It’s worth analyzing because we have a very twitchy market at the moment.
Online prediction market PredictIt has a contract for this: “Will Donald Trump be impeached in his first term?” There is already over $250,000 wagered on this question (large by the standards of the platform). Here are the odds:
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The current probability is basically a coin toss: last trade shows a 46% chance of impeachment.
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The lowest close of 2018 was on March 12th (one month ago) at 36%.
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There was a print at 50% just today, and current levels are the highest in the last 90 days.
Our take: online prediction markets can be gamed, so take this (and all of them) with a grain of salt. But we thought you should know about this indicator and what it currently reads. See it here (and read the exact rules of the contract):
#2. Fed Funds Futures after yesterday’s Fed minutes.
The basics of the document are straightforward enough. The US economy is doing fine, inflation will likely rise, and further rate hikes are appropriate.
Here’s what the Fed Funds Futures show, post the minutes (prices as of 8pm East Coast Time):
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Expectations for a June rate hike actually dropped today, to 83% from 93% yesterday. Still, that’s pretty close to a lock. Expect the Fed to move 25 basis points then, taking Fed Funds to 175 – 200 basis points.
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Odds of a September hike declined as well. They are now 50.3%, down from 55.7% yesterday. Perhaps the comments in the minutes about the damaging effects of a trade war caused this revision, or the shaky close to equities, or the uncertainties about what may happen in Syria.
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The December futures show essentially 25% odds that the Fed will move 4 times this year, but also 25% odds they will move just twice. Highest odds go to three moves, at 45%. Put another way: there’s not a lot of conviction here.
Our take: don’t let anyone tell you that “Everyone knows the Fed is moving three times in 2018”.
Fed Funds Futures say otherwise, and loudly. There is real uncertainty here and, therefore, a real chance (we’d say certainty) for equity market volatility around the topic.
#3. Earnings season starts Friday.
The bull case for US stocks right now rests on one pillar: that public companies will do their usual thing and beat the quarter. We believe they will, so we remain positive on domestic equities. But we also recognize the hurdle is high. From FactSet’s weekly Earnings Insight report:
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Wall Street analysts expect the companies of the S&P 500 to print 7.3% revenue growth in Q1 2018 versus last year. Tech, still market leadership, should show 14.2% top line comps to Q1 2017.
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They expect earnings growth (including the effects of tax reform) to show 17.1% growth versus Q1 2017. Tech is expected to post 22.0% growth in net income.
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Since management guidance about Q2 will likely be just as important as the reported numbers, consider the consensus there: 7.7% revenue growth and 19.1% earnings growth.
Our take: the bar is high for this earnings season.
On the plus side, the performance differential post-earnings reports for companies that beat/miss will likely be larger than average. An ideal environment, in other words, for active managers.
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