Mike’s Morning Brief – November 7, 2018

By November 7, 2018 Mike's Morning Brief
san francisco investment management

What’s going on in the world…

Market opens sharply higher as the most expensive midterm elections are now behind us. Democrats took back the House and grabbed some strategic Governorships, while Republicans increased their control in the Senate. The results were almost exactly as forecast. This was quite a different result from 2016 expectations. So what does this mean? The Market is likely running on the prospects for gridlock. Historically, gridlock has been good for investors. The pro-growth policies already in place will likely stay in place. Will Congress come together in bipartisan fashion to govern with collaboration or is the hostility about to spike? Evidence suggests the latter. Despite the strong economic backdrop, party leaders are extremely divided about the direction the nation is headed. An infrastructure bill would get support from both sides. But will they agree to do it? In many ways, the midterm completion merely means that the 2020 Presidential election has just begun. The Mueller investigation is still out there, with rumors that it might be wrapped up after Thanksgiving. Cabinet shakeups are very normal after midterms, and there are a number of White House staff members expected to leave. Attorney General Jeff Sessions and Defense Secretary James Mattis are atop the list. We shall see. But stocks around the globe are in rally mode this morning. China and Japan were the standout laggards. Oil prices are higher while the Dollar is falling. Interest rates are ticking down. Industrials and Tech are leading. Financials are higher in early trading as well, but the new oversight committee in the House is not expected to be kind to the banks. What does this mean for trade tensions with China? We shall soon find out if there is any budge in the tariff talk. The 2 Presidents are still expected to meet at the G20 in 3 weeks. The Fed begins its 2-day meeting today with a statement expected tomorrow. A rate hike is not in the cards for November, but the Market is assigning an 81% probability for a final hike next month. It was well over 90% 6 weeks ago. Imagine if they caught everyone by surprise and raised rates tomorrow. The Market would be caught off guard and likely react in a tizzy to start. But it might be the best thing and then be done with it for now while they reassess in 2019. Keep those belts buckled. I seriously wonder if this rally today even holds. We expect this volatile price action to continue.

Have a great morning,

Mike Frazier