As Donald J. Trump became the third U.S. President to be impeached, it provided yet another a window into an American public deeply divided along party lines. It's clear that the outcome of this process will have lasting political consequences heading into the 2020 elections.
Despite being impeached, it appears unlikely that the U.S. President will be removed from office. The case will now go to trial in the Senate. Removing President Trump would require a two-thirds majority vote—which would require at least 20 Republican Senators to vote against the President. The reality is that President Trump holds a 90% approval rating among Republicans and an overall approval rating of 43% among the American public—similar numbers enjoyed by Barack Obama in his third year in office prior to being reelected.1
It is almost certain President Trump will be acquitted and be nominated once again by the Republican party to run in the 2020 election. Historically, the economy needs to be weak to remove a sitting President after their first term. So, despite widespread disapproval of many of his actions, President Trump's chances of winning a second term remain high, especially in light of the resilient U.S. economy.
As we review our positioning, we look to clarify a few key variables: Will the U.S. economy stay strong heading into the 2020 election? And what does the presidential impeachment mean for your portfolios here at MD?
Here's our take.
The U.S. economy continues to roll forward
U.S. consumers are happily... consuming
As Washington fights over impeachment, the U.S. economy remains resilient with stable consumption. Retail sales are up 3.7% year-over-year in October, which is an improvement from the 1.8% pace set last December, according to the U.S. Census Bureau.2 Consumer confidence is also high, with the University of Michigan's Consumer Sentiment Index reaching 96.8 in November, rebounding from an August low of 89.8.3
U.S. employment remains a strong positive
U.S. unemployment dipped to 3.5%, its lowest point since May 1969. The economy added 266,000 jobs in November. September and October were revised upwards by 41,000 jobs (combined).4 Additionally, wage growth continues, with a 3.1% year-over-year increase in average hourly earnings5—the fastest pace seen during the current expansionary run.
Housing market provides support
Existing home sales shot up to 5.46 million homes, a 4.6% year-over-year increase, powered by low 30-year mortgage rates (3.7%).6 This marks a solid recovery from the 2018 decline as the Fed was raising rates. New home sales have also continued to recover after the sharp drop resulting from the housing bubble with 733,000 new homes sold as of October.7
The U.S. became a net exporter of petroleum
The move to energy independence took a serious step forward with the U.S. exporting 89,000 more barrels of petroleum per day than it imported in September. This is the first time this has happened since monthly records began in 1973.8
It's not all rosy, there are some warning signs
Trade with China remains an uncertainty
While the economy is clearly showing signs of strength, the investment landscape is looking a bit rockier. However, areas of weakness may turn with the business cycle, especially if a trade truce is reached. The President does have some control over this as it is a foreign policy issue and he started the dispute to begin with. Details are still being ironed out over the recent announcement of a potential “phase 1” deal, but so far it’s a clear sign of the willingness of both sides to make concessions.
Mediocre corporate profits
On the S&P 500 profits have contracted, year-over-year earnings fell 1% last quarter and sales growth rose at a lowly rate of 3.5%. It will be difficult for stocks to rise materially in 2020 if earnings do not rebound from current levels.
Business investment remained flat last quarter
Investment in structures is down 7.3% while investment in equipment rose just 1%. In our view, this is evidence of a contracting “brick and mortar" economy (think Amazon vs. shopping malls) and weakness in the manufacturing sector. In contrast, intellectual property investment is up 7.8%, software 9.9% and research and development 6.9% year-over-year.9 This underscores a shifting focus to investing in technology and the growing importance of the service sector in the U.S economy.
Purchasing Managers Index readings are mixed
The Markit U.S. Purchasing Managers Index (PMI) rose to 52.6 in November, recovering from a low of 50.3 in October (A reading above 50 indicates a net expansion in manufacturing). However, the Institute of Supply Management PMI, which is more exposed to large multinationals, continues to signal contraction at 48.1, barely moving since September's low of 47.8. A resolution in the China trade dispute, however, should see these numbers move into favourable territory as improved readings typically correlate with a rebound in earnings, investment, and international trade.
What's likely to happen?
While removal from office doesn't appear to be likely, markets could face increasing risk if the likelihood increases or the odds of reelection dip. Trump's 2017-2018 tax cuts were a boon to stock markets while Democratic contenders are expressing hard stances on shale energy extraction, the technology sector, and the healthcare sector. Under this scenario, these sectors may come under pressure and further challenge the U.S. stock market.
We remain overweight U.S. equities
The more likely scenario is that the structural strength in the North American economy will persist. Currently, we maintain an overweight allocation to equities overall, of which U.S. equities represents 61% of global developed markets.
We are overweight consumer discretionary and industrials in the MDPIM U.S. Equity Pool. Both sectors should benefit from a rebound in manufacturing and trade as well as growing strength in consumption. Conversely, we are underweight information technology which may provide some protection from the risks of regulatory scrutiny and relatively expensive valuations. Our cash position remains higher to bolster our portfolio against potential volatility in the market.
We have also recently started to bolster our position in international equities. Many of these markets have come under pressure from Chinese and Eurozone weakness, but could stand to benefit more should a recovery occur.
For more information about the presidential situation, how it may impact your portfolio, or how we've positioned your portfolio, please contact your MD Advisor*.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec).
2 Advanced Monthly Sales for Retail and Food Services, U.S. Census Bureau
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