Why do U.S. equity markets care about the firing of an FBI director?

In this week’s video update:

  • U.S. FBI director gets fired. Why did the markets react?
  • Europe and Japan released Q1 GDP reports this week. How well are they doing?
  • Can low volatility be dangerous?

On this week’s episode of Market Week in Review, Senior Investment Strategist Paul Eitelman was joined by host Todd LaFountaine, program director, advisor insights. Todd introduced the episode by pointing out the steep selloff of U.S. equities on May 17, and said it was in reaction to the firing of former U.S. Federal Bureau of Investigations Director (FBI), James Comey, by U.S. President Donald Trump. So why did the markets react? Why do they care who gets fired from the FBI?

Eitelman pointed out that this week’s political distraction in Washington D.C. is impacting the timeline of the what the markets really care about—corporate tax reform. Eitelman stated that this idea of tax cuts in the U.S. has been one of the key catalysts for pushing U.S. equity markets higher since last November. It increasingly looks like that process is now moving very slowly. The Trump administration initially started talking about wanting to achieve comprehensive tax reforms in August of 2017. Eitelman pointed out that with this week’s distractions, even an end of year deadline for tax reform is starting to look unlikely.

For investors, Russell Investments strategists believe that their primary focus should not be on political distractions, but on fundamentals. The secondary focus should be on progress toward the tax reform, because it’s the policy issue that matters from the market’s perspective.

Good global news

Shifting away from the U.S., Eitelman shared some encouraging developments globally. This week, the first quarter gross domestic product (GDP) reports from Europe and Japan were released, both showing around 2% annualized growth, and both outperformed the U.S. economy over the same time period. In addition, earnings-growth data has been strong in Europe, Japan and in emerging markets.

Low first quarter volatility in U.S. Equity markets

What about volatility? Is no news potentially bad news? Eitelman mentioned that The Chicago Board Options Exchange Volatility Index, commonly known as the VIX, showed that volatility in U.S. equities over the first quarter of 2017 was the lowest it’s been in over a decade—and the second lowest ever. According to Eitelman, when volatility is very low, it can be a sign of investor complacency and can create challenges around investor sentiment. When that flat sentiment score in U.S. equities is coupled with high valuation, our strategists take a cautionary view of that market sector.

Watch the video now.