It’s the politics stupid
It was James Carville, the political advisor in the 1992 Clinton presidential campaign who, when high-lighting what really mattered in that election said “It’s the economy, stupid”. This year, as far as financial markets are concerned it appears reversed. Politics has often been in the driving seat for financial markets and economies. Brexit was the political blockbuster that markets fixated upon, and failed to foresee the outcome. It is still far from clear what the ultimate impact will be.
The upcoming constitutional reform referendum in Italy in December is another mile-stone in 2016’s political pathway. The rejection of the proposed reforms could be a major risk to the economic outcome. Current opinion polls (for what they’re worth) show both sides are very close. The stakes get higher after that!
Financial markets are likely to focus as seldom before on the campaign and outcome of the US Presidential Election. There is always much debate as to whether the Presidential cycle has any impact on the US stock market, or which is the best party to have control of congress. For what it’s worth, the data going back to 1880 suggest that on average, a Democratic President is better for the S&P index, but a Republican Congress is even better. In truth, it’s not that apparent how much the political cycle influences the markets. The averages may mask very different economic environments.
This doesn’t, however, feel like an “average” election year and experience elsewhere shows that very little can be taken for granted. The shift towards “anti-establishment” parties and politics has manifested itself throughout Europe and in the UK. Polls and prediction markets have also been swept aside by the results in many instances. We now face into the campaign for the leadership of, perhaps, the world’s most influential nation with the outcome in five weeks time.
While still operating very much within the political framework, the Trump candidacy can be seen as anti-establishment or a protest vote and, certainly, a lightning rod for many who feel let down or disenfranchised by the political system and many do. Analysis from the Pew Research Centre suggests that only 19% of the US population trust the government and this is the lowest it’s been in the past 50 years.
Donald Trump’s campaign has been long on rhetoric but short on detail. This certainly doesn’t help financial market analysts form a coherent view. How do the candidates differ on policy? For Trump there would be some pushback on trade liberalisation. He would also most likely move to dramatically cut corporate tax rates and to jump start a lot of infrastructure projects. On healthcare he hasn’t been very specific apart from encouraging cheaper imports. Hilary Clinton would look to expand the current medical system but, is also likely to focus on greater price transparency. Essentially markets are likely to see her as a status quo candidate.
In the past, markets often looked through US elections, aware how dependent the President is on Congress to actually enact legislation. Policies can change between campaigning and governing. The Brexit outcome suggests that investors may be more aware of, and sensitive to the mood of the campaign.
When the US election is out of the way, there are German and French elections in 2017 to look forward to!
It would be reasonable to expect some volatility in markets in the face of these events.
How is Appian positioned for this?
Our Value Funds remain truly diversified across many asset classes and with cash levels close to 30% we are well equipped to navigate any political storms. Our Equity portfolios are equally well spread and regularly “stress-tested” to ensure we have quality stocks which can (and have) weathered short-term market volatility.