It’s commonly known that investors, generally speaking, fear uncertainty. It’s often been the case throughout market history that uncertainty begets anxiety, which has been known to disrupt markets. Any number of things incite what ultimately leads to volatility. Case in point: the U.S. presidential election.
While the nature of investing is a balance of risk and reward there are few things out there that could never be classified as a “sure thing.” This election is at the opposite end of that predictive spectrum – with unreliable polling information and consequences that few can accurately quantify.
With less than a week before voters choose their next Commander in Chief, 2016 has been a year of political risk in the U.S. like no other. But do elections, whether driven by economic issues, candidates’ character flaws, or alleged illicit email activity, matter to the markets?
A famous quote that links politics and markets comes from James Carville, a political adviser to President Bill Clinton. In 1993, as investors grew wary about the level of government spending within the U.S. economy, Carville was reported to have said: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”
As interest rates and currency markets are intrinsically linked – currency movements are a reaction to expectations of where interest rates will be in the future on a relative basis. We look at the link from both a correlation and causation perspective.
This year’s presidential election has been one for the ages and unsettling for those in the markets given the rise of what some have called “Vox Populi” risk: the rise of populist, sometimes single-issue political movements.
This election is a nightmare for financial markets, and you rarely find optimists in your nightmares. As such, the market has sold off to avoid risk in the lead up to the vote. Emerging market? High yield? Not a haven? Dump it. There are only a few havens in the world of investing, the U.S. among them.
Regardless of the election outcome, governments will continue to have a significant influence on market moves courtesy of the weary central banks. Monetary policy has arguably hit its limits in recent years as developed market economies have slipped close to deflation, and in some cases, into negative territory. Quantitative easing has helped stabilize the banking system, but trickle down to the average business or consumer has been painfully poor. Demand is weak, as is growth but the policy cupboard is looking rather threadbare and central bankers rely on governments to pull their weight.
Issues of religion, immigration and healthcare have occupied more headlines than fiscal issues in this campaign. To be fair, we do not expect much U.S. public policy to change, either fiscal or monetary that will impact global growth under a Clinton administration. Under Trump, increased fiscal spending and a lower tax regime may allow for a spillover of growth into the global economy. He has also made hawkish hints on monetary policy and exhibited a reticence to reappoint Fed Chair Janet Yellen or her Vice Chair Stanley Fischer. Similarly, his desire to allow to open a tax window to corporations looking to repatriate dollars could easily prompt large-scale dollar gains as a similar policy did in 2004.
Currency and politics are uneasy bed fellows at the best of times and today’s markets are a few standard deviations away from best. There is, however, no better barometer of political risk out there.