The Greatest Show on Earth
After 146 years, the Greatest Show on Earth, Ringling Bros. and Barnum & Bailey Circus took its final bow. The lions, tigers and bears, along with an army of circus performers and technicians, end a tradition that first had its roots in 1871 under showman P. T. Barnum. Don’t worry circus fans. Thrills still await just east of the Potomac River. Washington and its legion of ferocious political animals are here to entertain you with a series of shows on Capitol Hill that’s likely to run for years.
Once again, the Washington Circus was the driving force behind equity returns last week, as another leak rocked the administration. Investors were forced to accept the probability that the administration’s economic platform would take a backseat to politics. The conversation has shifted from tax reform and infrastructure to investigations—and even impeachment.
The leak of former FBI Director James Comey’s memo claiming Trump asked for an end to the Former national security advisor Michael Flynn investigation is sure to bring a summer of hearings with Comey the star attraction. Deputy Attorney General Rod Rosenstein announced the appointment of a special counsel Robert Mueller, former FBI Director under President Bush and for a short time President Obama.
Of course, lost in the confusion is a very good earnings season with most economic indicators still in the green. In addition to the Washington turmoil, the recent out-performance of US Treasurys has been a rising concern. For now, the burden of proof is on the bulls to regain control of investor sentiment.
Shortly after the Comey revelation, consensus expectations of a rate hike in July fell dramatically. However, by the end of the week, the consensus once again believes the Fed will follow through with normalization. In the past, the Fed has blinked in the face of just about every hiccup in the markets. Let’s see if Janet Yellen and Company have what it takes to stare down the bears.
We’ve seen rolling corrections for most of the last year, as investors bounce from one sector to the next. However, as seen in the chart above, the bigger battle is between growth and value. On the heels of the election last year, value jumped into the lead as investors picked up shares of beaten down financial and industrial stocks. The prospect of a rollback in regulatory overreach, along with higher rates and tax reform, set the stage for the out-performance of S&P 500 Value ETF (IVE) over its sister ETF, Growth (IVW). However, as challenges mount for the administration, it’s easy to see how the tide has recently turned, with growth once again jumping to the head of the pack.
It remains to be seen whether the appointment of a special counsel can calm the Washington waters and let Congress get back to work. Eventually, investors will turn back to fundamentals, but for now the Greatest Show on Earth is in Washington, not on Wall Street. While no date has been set for Comey’s testimony, I suspect his next public appearance could deliver broadcast ratings that rival those of the Super Bowl.
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