Voices For Impeachment Louder Than Ever

We conducted that investigation, and we kept the office of the acting attorney general apprised of the progress of our work.  And as set forth in the report, after that investigation, if we had had confidence that the president clearly did not commit a crime, we would have said so.

We did not, however, make a determination as to whether the president did commit a crime.

-Robert Mueller

Don’t look now, but Speaker of the House Nancy Pelosi saved the market from potentially the worst drubbing of the year when her comments curbed selling twice.

Wall Street traders and algorithms had no idea how to read between the lines of Robert Mueller’s statement to the press. In fact, the market edged higher.

Then, the media latched onto a line that fit the impeachment narrative. Headlines began to fly, and stocks began to tumble.

First came a statement from her office that voiced recognition of Mr. Mueller and his work during the two-year probe, and she went on to say that no one is above the law – not even the President.

“Special Counsel Mueller made clear that he did not exonerate the President when he stated, ‘If we had confidence that the President clearly did not commit a crime, we would have said so.’  He stated that the decision not to indict stemmed directly from the Department of Justice’s policy that a sitting President cannot be indicted.  Despite Department of Justice policy to the contrary, no one is above the law – not even the President.

-Nancy Pelosi

However, her statement said nothing about impeachment, nor did it suggest President Trump was orchestrating a cover-up. The market saw this initial reaction as a sign of the top Democrat in the House, who still wanted to avoid attempts to impeach the President.  

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Of course, the voices for impeachment within the Democratic Party were louder than ever, clinging to Mueller’s lack of confidence and comments the President didn’t commit a crime. After coming back 150 Dow points, all the major indices turned lower again.

In the final hour of trading, Speaker Pelosi, while speaking at an event hosted by the Commonwealth Club of California, said President Trump wants to make a deal on infrastructure. She sounded off on the Russian probe, but her sharpest barbs were saved for Facebook (FB), which has allowed a doctored video of her to remain on its platform. 

Once again, Nancy Pelosi pivoted from impeachment to talk about collaboration with the White House. Those comments sparked more buying, led by material names, which saw the sector eke out a small gain for the session. 

Once again in the second consecutive session, Utilities took the hardest hit while Energy was the biggest losing sector for May, as we wrap up the month.

Yellow Flags

The reaction to earnings misses has been brutal across all sectors and industries, but the carnage seen in retailers has been mind-boggling. I’m not talking about taking some off the top but punishing blows for slight misses or slightly lower guidance. I’m not sure what to make of it because the selling doesn’t match underlying fundamentals, even when they have become less attractive.

Unfortunately, we are stuck in a couple of these names, and I’m reluctant to close them because the selling is overdone. And yet, it’s too early to buy these names other than for short-term trades.

On the Upside

Chip stocks, along with several individual names that have excessive business exposure to China, acted great yesterday. After the close, cybersecurity stocks popped on earnings results. It could be counterintuitive, but tech could lead the market today. Of course, at some point, the underlying value and strong fundamentals will overcome negative speculation and investor bias.

Rethinking American Style Capitalism: AKA Selling Our Soul

The economic theory that guided American-style capitalism has centered on the magic of comparative advantage, which isn’t the same as being the best – it’s just being the most efficient. For that reason, we have been told everyone wins with free trade, and to celebrate when other nations are willing to provide cheaper versions of stuff we can also produce.

Generally, I agree. However, there are variables to this line of thinking we are learning again - the hard way today.

Years ago, the U.S. and other countries stopped mining rare earth materials because they were being produced so cheaply out of China. Yesterday morning, there was the talk of China weaponizing rare earth materials to hurt American companies and consumers. This again proves that there are several ways to measure opportunity costs or what we give up in any trade relationship.

The conclusion is: there are greater benefits to society than cheap stuff; namely our jobs, physical and economic security, and independence.

Portfolio Approach

There are a ton of stocks to buy for trades. I am not sure about creating core positions, but I’m also not going to try to pick the exact bottom.  

Today’s Session

There is lots of economic data out today, including:

• Pending Home Sales
• Initial Jobless Claims
• 1Q 2019 Gross Domestic Product (GDP) (second estimate)
• International Trade
• Retail Inventories (April)
• Wholesale Inventories (April)

While the market is still higher for the year, we are now off the highs big time, and some analysts are talking about going all the way back to retest the low December 24, 2018. I don’t see that happening, and certainly not for fundamental reasons.

Year-to-Date Performance

• S&P 500: +11.0%
• Dow Jones Industrial Average: +7.7%
• NASDAQ Composite: +13.8%
• Russell 2000: +10.5%

1Q 2019 GDP

The first revision of 1Q 2019 GDP was slightly higher than official projections, but I think Wall Street was looking for a much lower number.

Highlights

• GDP continues to be stronger than expected
• IP investments remain elevated
• Trade tilts in favor of US

Red Flags

• Consumer spending slowing
• Business investment lowest since 4Q 2016
• Residential investment -3.5 (down five quarters in a row)

Equities continue to grapple with finding support.