The level of discourse was so disappointing in last week’s US presidential debate that it was tempting to move up the dial and watch pro football, where the combatants at least get to wear helmets. Personal attacks, rancorous exchanges, smirks and eye rolling... they epitomised why many voters have despaired over the choice they face.
What all this focus on personality obscures, of course, is the actual issues the country faces and the philosophical differences that could seriously impact how to solve them — whether low growth, suffocating regulation, federal debt, health care, income inequality or national security, to name a few.
Not all the issues have concrete implications for investors at this stage. In recent weeks, my CIO colleagues and I have taken turns considering potential drivers for the economy and markets. Erik Knutzen, CIO for Multi-Asset Class, talked about a global focus in US earnings and whether weakness could contribute to new volatility in a market that is “priced to perfection”; Fixed Income CIO Brad Tank considered the potential impacts of Japan’s steps toward “helicopter money”; and I explored whether the two major US political parties could work to improve the country’s dilapidated infrastructure.
Rating the election’s impact
As far as the election is concerned, it’s hard to tell what the impact will be. Over the last eight presidential election cycles, inauguration years have seen exceptionally strong returns for the S&P 500, with an average gain of nearly 20 per cent and in several cases returns of over 30 per cent. Only in 2001, in the wake of the tech bubble, did the year turn out to be negative. In part, this positive trend may be a function of stimulus leading up to elections, or reduced policy uncertainty, or simply a touch of optimism tied to the fresh start of a four-year term. It may be a simplistic idea, but elections ultimately have tended to be a catalyst for stocks.
Could this time be different? A key concern is negative voter perception of both Hillary Clinton and Donald Trump, who have the highest unfavourable ratings of any presidential candidates in modern history. Regardless of who gets elected, residual anger on the part of the losing party could intensify already entrenched gridlock.
This ties into prospects for fiscal stimulus, ideally in the form of new infrastructure spending, or a deal to repatriate corporations’ overseas earnings. We remain sceptical on that front, and we believe that politicians could keep relying on easy money from the Federal Reserve to bail them out along with the economy. With minimal action in Washington, it seems likely that GDP could continue stumbling along at a 1-2 per cent pace in the coming year.
Softening angle on equities
Such meagre growth of course provides little fuel for the stock market. Our Asset Allocation Committee recently downgraded its 12-month outlook for US equities to “slightly underweight,” given rich valuations, a modestly higher rate forecast and potential volatility tied to earnings stagnation. (The Committee’s quarterly report will be available shortly at www.nb.com; and Erik and I will host a related webinar on October 11 — visit our website in the coming days for more information.)
It would be tempting to minimise the potential impact of the presidential race, to “change the channel” and focus strictly on fundamentals that undoubtedly can sway the markets. But there’s a point where electoral combat and likely gridlock weigh on earnings prospects and growth trends. My ‘Hail Mary pass’ would be that this contest will shake things up enough that politicians will work together, at least for a while, to deal with entrenched problems.
Joseph V. Amato, Chief Investment Officer for Equities at Neuberger Berman
