Political Risk Returns: Volatile Markets Close Mixed

Wall Street endured a volatile Wednesday. As political risks mounted, the Dow and S&P 500 closed lower. The Nasdaq eked out a slight gain. Below, I’ll show you how to avoid getting chopped up when the action is choppy.

Like it or not, investors find themselves drawn more and more into politics. They’re confused about the tax bill’s myriad loose ends. They aren’t sure who wins or loses.

They’re also anxious about the Russia probe. The press confirmed Wednesday that special counsel Robert Mueller slapped Deutsche Bank with a subpoena for financial records related to Donald Trump. That could spell trouble for the guy who’s supposed to sign the tax bill.

Further spooking investors was President Trump’s renewed threat on Wednesday about a possible U.S. government shutdown by week’s end.

Economic data released Wednesday was positive, keeping stocks from slipping deeper into the red. The Labor Department estimated a third-quarter U.S. productivity gain of 3%, the strongest pace in three years.

ADP reported Wednesday that private employers in November added 190,000 jobs, beating estimates of 180,000. This healthy number bodes well for the Labor Department’s jobs report due Friday. Solid employment lifts consumer confidence, which is vital for holiday shopping. Retail stocks were big gainers Wednesday.

The Commerce Department reported that the U.S. trade deficit jumped 8.6% in October. Imports from China and Mexico hit a record high.

The monthly trade gap totaled $48.7 billion in October. That’s the highest level for a full month since Trump took office. The president promised to eliminate the trade deficit in one or two years. Instead, the 2017 deficit is on track to exceed the 2016 level of $505 billion. A trade deficit lowers demand for domestic products, which can lead to job losses.

The widening trade deficit raises the question of truth in politics. If you seek a coping mechanism in this era of fake news, it’s this: watch what public officials do, not what they say. This rule applies to any administration, Republican or Democratic. In the corridors of power, words are cheap.

Words versus deeds…

“America First” rhetoric fueled fears of a trade war. Didn’t happen.

The Trump administration has signed trade agreements that benefit all sides. China was the bad guy of the election. But during his trip to China in November, Trump expressed warm support for its leaders. He came bearing billion-dollar deals.

Remember Mexico? That’s the country supposedly sending us “bad hombres.” Actually, Mexico is sending us smartphones, televisions, and cars.

In January 2017, Trump threatened to slap a 20% tax on imports from Mexico to help pay for his border wall.

Fast forward to December 2017. The U.S. is easing its demands on Mexico. During the first phase of NAFTA negotiations, America talked tough. But now the U.S. is more conciliatory. As for the border wall… don’t hold your breath. There’s no money to build it.

Here’s what the press ignores: Mexico’s economy is booming. Its middle class is expanding. Its factories are humming. Its car makers are crushing export records. Its gadgets grace the shelves of your local Wal-Mart.

Chinese workers are demanding higher wages, which enhances the competitiveness of Mexico. Prices are driven down across the board. Americans this Christmas will eagerly scoop up cheap goods from both countries. That’s how free markets work.

Lack of barriers has widened the U.S. trade imbalance. But it also has paved the way for synchronized global expansion. Growth is spread evenly across regions.

All of this comes as a relief to Wall Street. Protectionism makes for good slogans, but bad policy. In the end, it hurts stocks.

Stocks have posted solid gains this year. Valuations are high, but the table is set for further upside.

Estimates for U.S. gross domestic product (GDP) growth in the fourth quarter hover at 3%. If this projection holds true, GDP growth will have posted its strongest and longest streak of quarterly increases in more than 10 years.

Estimated S&P 500 revenue growth in the fourth quarter is 6.4%. Revenue growth is expected for all 11 sectors.

Estimated fourth-quarter earnings growth is 10.5%. It would mark the third time in the past four quarters that the S&P 500 has posted double-digit earnings growth. All 11 sectors are on track to report earnings growth for the quarter, with energy leading the way.

Production cuts have pushed up oil prices, lifting many energy stocks. That said, uncertainty afflicts energy. The glut persists, corporate debt lingers, and prices gyrate. OPEC is losing clout. But oil and gas prices seem to have found a bottom.

On Wednesday, West Texas Intermediate fell $1.71 to close at $55.91 per barrel. Brent North Sea crude fell $1.69 to close at $61.17/bbl.

Export sectors are thriving. Commodity prices are rising. Manufacturing is resurgent. Middle classes around the world are opening their wallets. The U.S. has wisely refrained from wrecking this prosperity with trade restrictions.

The White House preaches populism, but hires Wall Street veterans who adopt a global view. The Democrats would have done the same. Forget “red” or “blue” distinctions. One party dominates, and it’s the color of money.

Remember my rule. When the big shots flap their gums, don’t listen to what they say. Watch what they do.

Let’s see what the markets did.

Wednesday Market Wrap

  • DJIA: -0.16% or -39.66 points to close at 24,140.98
  • S&P 500: -0.01% or -0.30 points to close at 2,629.27
  • Nasdaq: +0.21% or +14.16 points to close at 6,776.38

Wednesday’s Big Gainers

  •  DaVita (NYSE: DVA) +13.54%

Doctor group target of buyout.

  • H&R Block (NYSE: HRB) +10.34%

Tax bill should boost preparer.

  • Oxford Industries (NYSE: OXM) +8.98%

Apparel retailer beats on earnings.

Wednesday’s Big Losers

  • Valhi (NYSE: VHI) -27.88%

Diverse materials firm faces earnings headwinds.

  • Tronox (NYSE: TROX) -26.99%

Chemical firm fights FTC.

  • Bill Barrett (NYSE: BBG) -18.35%

Analysts downgrade energy firm.

Letters to the Editor

“In your opinion, what is shaking the market the most: tax reform, talks of shutting down the government, news (fake news), speculations, or something else? What do you think of the future of the market?” — Lyubov L.

Lyubov, hit the mute button on your television. I’ve explained the main market drivers, above.

Don’t make decisions based on fleeting news, whether it’s “fake” or not. Cable news is less interested in truth and more interested in ratings. Dramatic headlines drive viewership, but they shouldn’t drive your portfolio.

The bull could have longer to run, but risks remain. Keep an eye on valuations. There’s still money to be made in this market, but overbought stocks are ripe for a tumble. Stay cautious.

What main factors do you see affecting stocks? Share your opinion:

John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.

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