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Much Ado About Nothing

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At the start of the week, market watchers were anxiously anticipating two seemingly major events: the Congressional testimony of former FBI Director James Comey and the Parliamentary election in the U.K. At least in the near term, both events turned out to be more flash than substance.

In terms of Comey’s Senate testimony, there were no explosive revelations that many were hoping for, although both sides of the aisle were able to claim minor victories. Comey did say that he felt President Trump had directed him to drop an investigation into former national security adviser Mike Flynn. However, he declined to offer his opinion as to whether he thought the president was trying to obstruct justice, instead deferring to the findings of the recently appointed special counsel.

Comey’s own credibility also took a bit of a hit after he admitted that, after his firing, he leaked accounts of his conversations with the president in the hopes of prompting the appointment of a special counsel. Comey also testified that the president was not the target of the FBI’s investigation into Russia’s alleged interference in the 2016 presidential election. Comey did say, though, that he felt he was fired by the president because of the Russian investigation.

On the other side of the pond, U.K. Prime Minister Teresa May’s gamble to solidify her power backfired. The results of this week’s snap election showed May’s ruling Conservative party short of the majority needed to control Britain’s Parliament. May is resisting opposition calls to resign and instead is moving to form a minority government with the Democratic Unionist Party, a small Northern Irish party whose 10 seats are enough to give May and her Conservatives a majority.

The election results now call into question what Britain’s exit from the European Union (EU), called Brexit, will look like. Without a majority in Parliament, May cannot take a hard stance in negotiations with the EU for fear she won’t have its support. European officials urged Britain to begin Brexit talks as soon as possible. The president of the European Council, Donald Tusk, said that the EU won’t put Britain’s two-year window for exiting on hold. That period is set to end in March 2019. According to The Wall Street Journal, the worst-case scenario is that Britain isn’t able to maintain a “coherent negotiating position” and the Brexit clock runs out with no arrangement in place. All of this injects a great deal of uncertainty into British and European markets.

The market reactions both here at home and in Europe were rather muted in the face of this week’s events. On Thursday, stocks eked out a slight gain, with financial stocks taking the lead. As JJ Kinahan, chief market strategist at TD Ameritrade, said, “The market’s just shrugging off all this noise swirling around it.” European markets weren’t riled by the U.K. election results, as the STOXX Europe 600 Index gained 0.32% on Friday, while the U.K.’s FTSE 100 added 1.0%.

For investors, poll-watching is not an effective investment strategy. Elections come and go, so it is important to have a long-term outlook and be invested in a well-diversified portfolio.

Earnings Season Update

Two weeks ago, we erroneously stated that all of the companies in the SSR tracking portfolio had reported their results for the second calendar quarter of 2017. One last SSR stock reported its results for the current earnings season.

Now that earnings season for the second calendar quarter has ended for the SSR portfolio, here is the final tally. Adjusting for the additions and deletions made in April and May, 29 of the 36 stocks currently held in the SSR tracking portfolio reported positive earnings surprises, while six companies reported earnings that fell short of estimates. Only one company reported earnings that were in line with the consensus estimate.

The median earnings surprise for the current SSR portfolio was +4.2%, while the average surprise was +4.6%.

Wayne A. Thorp, CFA
Senior Financial Analyst, AAII
SSR Investment Committee
wayne@aaii.com
@WayneTaaii

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The Stock Superstars Report (SSR) publication was developed to educate individual investors on how to build a stock portfolio using a mix of strategies. The SSR is designed to provide all the information you need to manage a stock portfolio as well as to teach you about timely investment principles relating to the SSR portfolio and stock investing in general.

 

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