Market Complacency amid Political Disarray

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The previous two weeks have been dizzying in Washington, but, yet again, the markets barely responded.  If you recall, in mid-July the White House was exploring pardons for Trump’s family and Bloomberg reported that the Mueller investigation is examining the Trump organization.  Events then moved to various forms of the Republicans’ failure to pass an even nastier version of Obamacare repeal.  Last week, we saw the White House staff firings and a retired general taking control of the mayhem.  Keep in mind that the last time we had a general as chief of staff was in the waning days of the Nixon administration.

The surprising part is that the markets don’t reflect the risks.  U.S. stocks continue to hover near all-time highs while the VIX – the volatility indicator – is at historic lows.  Even futures on the VIX – indications of where volatility expectations will trade several months out – are trading at levels typical of very low risk periods.

The market’s complacency is in stark contrast to what is happening with the dollar.  The U.S. Dollar Index (DXY) is down even further this week, at lows not seen in 30 months.  The euro and the pound sterling are getting back to strengths last seen before Brexit and European nationalist concerns.  With such extreme indicators something has to give but how or when is unclear.

On the brighter side, Apple continues to push ahead with stellar earnings.  Those gains, however, are not driven by the U.S. consumer: over 60% of the revenue comes from foreign consumers who continue to thrive.  Because of tax inefficiencies here, much of those profits sits overseas.

Which leads us back to where we started — if Congress can get something done on tax reform, gains such as the ones achieved by Apple might actually make it to the U.S.  Combined with other companies in the same situation, tax reform addressing offshore profits would be a welcome boon to investors.  Such an event however requires the White House and Congress to write and pass major legislation which has yet to happen in this new administration.