As economy and earnings excel, here’s what’s dragging down stocks

Pedestrians walk past the New York Stock Exchange.

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Pedestrians walk past the New York Stock Exchange.

The U.S. economy and corporate earnings continue to impress, but markets’ positive momentum has been sapped by the political follies of the Trump administration. And from a trading perspective, the U.S. dollar is unlikely to stage much of a comeback unless the tone from Washington becomes decidedly more disciplined.

It is no secret that the economy is in decent shape. Monthly employment growth has averaged 184,000 this year, and the unemployment rate is down to 4.3 percent. The Atlanta Fed’s GDPNow estimate puts expected real third-quarter gross domestic product growth at 3.8 percent.

Meanwhile, S&P 500 earnings growth for the second quarter is set to come in at 10.2 percent, according to Factset, while revenue growth looks to be above 5 percent. This as large companies have done a better-than-average job of beating earnings expectations, with 73 percent besting analyst forecasts.

These more prosaic market drivers do not appear to be front of mind for most investors, however. The S&P 500 has suffered a punishing two weeks, and the U.S. dollar index is less than 2 percent from 31-month lows.

North Korea is again making some noise. Objecting to the annual joint military exercises between South Korea and the U.S., leader Kim Jong Un warned of a “merciless strike” following “reckless behavior driving the situation into the uncontrollable phase of a nuclear war.”
Still, in the wake of last week’s capitulation on its threat to bomb Guam, the rhetoric sounds more like bluster than a real risk. And North Korea nuclear worries may have finally moved to the back burner.

Yet the Trump administration may be turning its bellicose focus elsewhere, as the president plans to make a major policy announcement on Afghanistan tonight. If the news centers on a massive new surge in resources and personnel, the dollar could sell off once more on fears of a fresh American military adventure without much promise of success.

The news is not all bad out of Washington. The string of departures from the Trump White House continues, which would seem destabilizing, but many investors were encouraged by the exit of chief strategist Steve Bannon. With Bannon gone and Trump returning back to work, the focus in Washington, D.C., may shift back to tax reform, which would be positive for the dollar and stocks.

Of course, those looking for Donald Trump to make a concerted effort to focus on economic rather than political matters may well be left twisting in the wind.

[“Source-cnbc”]