Source: Ladbrokes Politics

At the time of this writing, the S&P futures had dropped 2% following the electoral outcome that saw Republican nominee Donald Trump secure the presidential bid and the Republican party retaining both the House and Senate.  The Germany DAX had also dropped 2% while the Japan Nikkei dropped 5.2%.  Although the negative market reactions were not on the same scale as Brexit back in June, clearly the markets had been positioned for a contrary outcome. 

The implications are too numerous to give them justice in this short communication piece, but 3D Asset Management wanted to provide some large picture perspectives on the electoral outcome:

1)      As Brexit and November 2016 clearly demonstrate, markets (whether financial assets or online bookmakers) are not equipped to predict electoral outcomes, particularly during a global populist wave against the establishment.  There are multiple reasons, but three come to mind:

  • Democracies rely on the principle of one person / one vote while financial markets rely on the principle of one dollar / one vote (credit to Paul McCulley). 
  • Financial markets and online bookmakers suffer from a lack of participatory diversity, a key component in the Wisdom of the Crowd
  • Eugene Fama is right (sort of).  Bubbles cannot be predicted before the fact since the markets merely reflect the consensus opinion on what is ‘most likely to happen,’ but the consensus outlook is not guaranteed.  Even though the markets were expecting one type of outcome, they were also pricing in a chance that such an outcome wouldn’t occur. 

2)      The global populist wave that is sweeping Western politics will also show up in the labor cost curve.  Minimum wage ballot initiatives passed in four states (Arizona, Colorado, Maine and Washington) as minimum wage advocates are pushing for $15 an hour (so far only California, New York, and Washington D.C. have approved $15 an hour).  Assuming that the U.S. were to remain committed to policies that afford flexibility in the capital to labor ratio mix, we would expect a further pick up in capital spending on productivity enhancing initiatives.  And should labor costs rise and perceived quality decline (something we highlighted here), then we would expect, ironically, for industrial productivity to rise after remaining in the doldrums since the 2008 recession. 

3)      Giving the populace what they want: increased infrastructure spending among other major initiatives.  The sky is the limit as Congress will likely deliver on a political-friendly wishlist that includes greater spending on the nation’s infrastructure.  The only constraint is, of course, capital market receptiveness in how this spending is going to be financed.  Will the Fed play along and not constrain fiscal policy after pleading for it since the 2008 financial crisis? 

  • As far as other initiatives are concerned (renegotiated trade deals, a border wall), these are more speculative in nature.  One should focus on how much political capital the incoming administration is going to bank AND what are they willing to spend that capital on?  The administration can’t have everything that was campaigned on.

4)      Investing around electoral outcomes is a fool’s errand, something we highlighted in August (‘How Should Investors Position for this Year’s Election? You’re Asking the Wrong Question’).  In the end, #2 and #3 merely reflect one outcome (now the consensus) but they could also turn out wrong.  This bears worth repeating:

“The right question investors should be asking is “Am I comfortable with my current risk positioning given the air of uncertainty surrounding the current political climate?” First, in making this assessment, check to make sure your political biases are not unduly affecting your investment decisions.  Second, revisit your time horizon for making risky investments such as equity investing.  If it is less than 10 years, then your investments may not be able to ride out the volatility that can come from risky investments.  If the markets do sell off, it will be more likely due to forces beyond which presidential candidate prevails in November.  Third, consider diversification.  The U.S. market is not the only stock market to invest in – there are plenty others, particularly in regions less susceptible to populist movements…If the current U.S. political environment is giving you angst, reconsider the merits of global diversification.”

 

Disclosures:

The above is the opinion of the author and should not be relied upon as investment advice or a forecast of the future. Neither the author nor the firm openly endorse any of the political candidates, parties, movements, etc. referenced in this article. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. It is not a recommendation, offer or solicitation to buy or sell any securities or implement any investment strategy. It is for informational purposes only. The above statistics, data, anecdotes and opinions of others are assumed to be true and accurate; however, 3D Asset Management does not warrant the accuracy of any of these. There is also no assurance that any of the above is all inclusive or complete. Past performance is no guarantee of future results. None of the services offered by 3D Asset Management are insured by the FDIC, and the reader is reminded that all investments contain risk. The opinions offered above are as of November 9, 2016, and are subject to change as influencing factors change. More detail regarding 3D Asset Management, its products, services, personnel, fees and investment methodologies are available in the firm’s Form ADV Part 2, which is available upon request by calling (860) 291-1998, option 2, or emailing sales@3dadvisor.com or visiting 3D’s website at www.3dadvisor.com.