The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

A Geopolitical Diet?

10/16/2018

There is obviously a close relationship between the economy and the stock market.  Sometimes, it is not close enough.  During the second quarter, the economy grew earnings 25% year-over-year.  During the third quarter, earnings were expected to rise 15% and actually increased 21%.  The fourth quarter is running 20% up.  Does the stock market growth reflect that growth in earnings?  Nope!

The economy is booming, with a shortage of labor being a primary constraint.  The stock market is also booming, within 5% of its record high, but with a surplus of geopolitical problems as a primary constraint.  Now, it is mere conjecture to speculate how the stock market would be impacted by individual geopolitical problems, but it helps clarify the problem of geopolitical weight.  I’ll predict . . .

1.  If Presidents Trump and Xi suddenly announced a new trade agreement, ending tariffs and ending the trade war, the Dow would jump 1,000 points.

2.  If Congress passed a comprehensive immigration package, actually addressing the problems and proving Congress is NOT utterly useless, the Dow would jump 800 points.

3.  If the Fed announced no more interest rate increases for a year, the Dow would jump 500 points.

4.  If Mueller ended his investigation and vindicated Trump, the Dow would jump 400 points.  On the other hand, if he indicted Trump, the Dow would drop 300 points before rising again.

The point is this:  There is a great deal of geopolitical weight on this stock market — even more than normal.

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