On Thursday, markets will have a few pieces of economic data to contend with, as the weekly report on initial jobless claims and a reading on producer prices are due out in the morning.
But expect the story on Thursday to be similar to what investors faced on Wednesday. Which is to say that the story isn’t really about markets or the economy. Instead, it is all about Washington, D.C.
Late Tuesday, President Donald Trump released a statement saying that he was relieving FBI director James Comey of his post.
What this means for markets isn’t clear. If anything.
Yahoo Finance’s Rick Newman notes that as political dramas like Trump’s relationship with the FBI and his ties to Russia dominate both the news cycle and the attention of folks in and around Washington, D.C., any movement on other Trump agenda items like tax reform gets pushed out into the future.
Yahoo Finance’s Sam Ro cites advisor Richard Bernstein who notes that, “politicians crave the spotlight, but it’s a shame that investors watch the show. History shows quite well that fundamentals, and not politics, ultimately drive the financial markets.”
And so while Wednesday did see Snapchat parent company Snap Inc. (SNAP) report earnings that missed and the stock dropped over 20%, news actually related to markets felt like background noise.
Much as we were in the days immediately following Trump’s inauguration, the focus for investors is on Washington, D.C. But with stocks sitting near all-time highs and volatility sitting near multi-decade lows, perhaps this shouldn’t be a surprise: politics is a way better show right now.
If there’s one theme that defines the divergence between financial markets and politics in the last couple months, it is that as political volatility has been and remains high, volatility in financial markets has plummeted.
To some this means that markets are, at their own peril, ignoring risks posed by the Trump administration. Specifically, that markets which had pinned hopes on big changes to the tax code and plans for infrastructure spending, among other issues, will be disappointed.
What gives with volatility, then? Volatility, of course, is the perfect subject about which markets — especially those who write about markets — can be preoccupied. A lot of volatility represents unsteady markets. This is bad.
But has also become popular to note that a lack of volatility is a sign of mass investor complacency about which we should be worried. As we noted earlier this week, strategists at Bespoke Investment Group have called this line of reasoning “fake news.” We don’t disagree.
Part of what fuels this endless have-it-both-ways logic of market volatility being bad whether it is present or not is that there haven’t been all that many compelling reasons for volatility to be low.
In a note published on Wednesday, Neil Dutta, an economist at Renaissance Macro, argued that the lack of volatility we’re seeing in financial markets is related to the amount of volatility we’re seeing in the economy. And in the economy, things are placid.
“While investors consider tax and regulatory changes that could shift market fundamentals, measures of market volatility remain low,” Dutta writes. “Perhaps investors have learned that recently, it pays to resist overreacting to politics events. We see the fundamentals at work: economic volatility has declined sharply recently to levels not seen since the Great Moderation.
“The rolling two-year standard deviation on quarterly changes in GDP has declined to mid-2000s levels when the VIX was about as low as it is today.”
And so while recently readings on overall GDP growth have been disappointing — the economy grew just 1.6% in all of 2016 and just 0.7% to start 2017 — there hasn’t been a huge amount of variation among these readings.
Over the last couple years, two themes have been consistent in the economy. Growth remains disappointing, jobs growth remains robust. And while this might not be the story that excites citizens or politicians, or even investors, this is a state of play that markets, at least, have adjusted to as acceptable.
Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
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