Clinton Investigation Trips Stocks; Fed Tees Up Rate Hike

If there were any doubt that equity investors prefer Clinton to Trump, it should have been erased early this afternoon after stocks fell quickly after FBI Director James Comey said that new evidence has prompted him to re-open the investigation of whether Hillary’s emails contained classified information. Of course, it would be surprising if any definitive judgment can be rendered in the next ten days before the election. Nevertheless this news shows that the race is not "over," as many had declared, despite the fact that HRC held a commanding – although shrinking – lead in the polls. This has been a most unusual election and perhaps if it would be surprising if we had no surprises before November 8. In the Senate, the Democrats hold a slightly better than two to one odds to gain control. In my last analysis I noted 3 fairly certain gains for the Democrats: Wisconsin, Illinois, and Indiana that brings them to 49 seats. The 50th seat could come from any one of 4 close races in New Hampshire, Pennsylvania, North Carolina, and now Missouri where Democrat Jason Kander has gained on GOP incumbent Roy Blunt. The Republicans have a chance of a pick-up in Nevada, where Joe Heck is making a strong bid to pickup the seat vacated by Harry Reid. A swing to Trump, even if Clinton maintains her lead, could decide these contests.

Next week I expect the Fed to tee up a December rate increase. Economic news since the September election has been strong enough for the Fed to move. To be sure, today’s GDP report, although coming in a bit above forecast, did not contain encouraging details. Much of gain came from higher than expected inventory accumulation while personal consumption lagged behind forecasts. Today’s report lowered some forecasters Q4 growth rate down to the mid 1s, which would bring Q4/Q4 growth well below the 2% that the Fed had forecast at the start of the year. Nevertheless, commodity prices have held firm, jobless claims are very low and payroll growth, to be reported next Friday, is expected to top 160k. The Fed will not have the payroll data by the time of Wednesday’s decision, but The Fed will have 2 more employment reports before the December 14 decision date.

Although the "beat rate" on Q3 earnings has been good, I am not impressed with the "forward guidance" offered by firms. Analysts forecast a big jump in Q4 and 2017 earnings, and it is looking increasingly likely actual earnings will fall far short. With the election and Fed rate hike uncertainty, it is hard to see stocks making significant headway. I have thus pared my yearend forecasts to 2150-2200 for the S&P 500 and 18,500 to 19,000 for the Dow Industrials.

Source:  JeremySiegel.com