The S&P futures are down 18 points and they are trading 0.8% below fair value. That negative disposition is reportedly the byproduct of heightened political angst that has resulted from a New York Times article indicating President Trump told (former) FBI Director Comey in February that he hoped the FBI could let go of its investigation of Trump's former national security adviser, Michael Flynn.
That allegation has been lodged based on a memo reportedly written by Mr. Comey detailing the conversation, parts of which were read to the Times reporter by an anonymous source who was said to be one of Mr. Comey's associates.
Media reports are now abuzz with suggestions that President Trump's request is tantamount to an obstruction of justice and quite possibly an impeachable offense.
We'll let the legal experts have their say on that. All we can say as stock market analysts this morning is that the stock market hasn't blithely dismissed the latest report -- and neither has the Treasury market for that matter.
The concern at hand is that an investigation into the matter could derail tax reform efforts, which have already been slow to get on track. Accordingly, the major indices are set to weaken, weighed down by a reconsideration of valuations that have gotten stretched on the back of a tax reform bid.
That bid was fostered by a belief that tax reform will drive stronger economic and earnings growth. It could still if tax reform happens, but timing is everything and there is a reasonable basis this morning at least to think the timing of tax reform legislation is going to get pushed back.
That assumption is wringing out a small portion of some of the speculative excess that has been built up in the market since the election -- and, yes, it is small.
The S&P 500 has risen 12.2% since election night. If the current indication holds up, it will open approximately 0.8% lower.
That isn't the opening indication one might associate with a complete re-think of the market view based on the aforementioned New York Times article. It's more of a deliberative indication, reflecting the understanding that the near-term risk for the stock market was already elevated with or without a potential political scandal since the market's valuation was already elevated.
In other words, the possible excuses for selling things off would be easier to rationalize than the possible reasons for blasting things off would be.
The New York Times article is certainly as good an excuse as any for market participants to acknowledge the tacit understanding that the stock market's run had already been looking a little weak in the knees given the narrow leadership that took it to record heights, all while the financials and transports were underperforming.
At yesterday's closing price, which was a whisker shy of a record high, the S&P 500 was trading at 17.5x forward twelve-month earnings, which is a 25% premium to the 10-year average. Without concrete signs of progress on tax reform, it becomes harder to rationalize further multiple expansion since that multiple has arguably taken into account already the stronger earnings growth that might flow from tax reform.
That's the gist of things as we see it. There is a concerning political matter at hand this morning, but ultimately, it's a valuation matter.
A weakening dollar and renewed buying interest in the Treasury market, which has driven the 10-yr yield back below 2.30% (currently 2.28%), are manifestations of the view that the U.S. economy may not live up to the high-growth expectations that took root following the election. The U.S. Dollar Index (97.88, -0.22, -0.2%), in fact, is below where it closed on election night (97.97).
The latter move has been driven by a resurgent euro, which has benefited from a belief that the eurozone economy isn't as weak vis-a-vis the U.S. economy as it was previously thought to be. Still, it also speaks to the point that U.S. growth concerns are not new today in the wake of the Times article.
The stock market is going to lurch lower at the open in a broad-based manner. A sense of unease about the expected move, and what could follow, is showing up in the CBOE Volatility Index (11.91, +1.26, +11.9%).