The market hasn’t had to account for increasing political and policy risk for a number of years. In 2012, it was widely expected that former President Barack Obama would win reelection.1 Markets were familiar with his economic policies and had already factored them into prices.
While it was a surprise to many when President Donald Trump was elected in 2016, the market reacted by factoring into prices the expectation of lighter agency regulation and corporate tax cuts.2
For the first time in six or seven years, we find that the market may have to begin accounting for increasing probabilities of a growing regulatory environment and higher taxes. As we near year-end, below are three market-moving political items we’re keeping an eye on.
1. Potential presidential impeachment. Impeachment proceedings against President Donald Trump have dominated news headlines over the last couple of months.3 It is always difficult to accurately predict how markets will react to events like this. The Nixon and Clinton impeachments can’t be used as guides for how markets might react this time because during those impeachments, the markets were reacting to much bigger economic news like the OPEC embargo4, immediate U.S. recession and double-digit inflation in 19735 as well as the emerging markets6 and Long-Term Capital Management hedge fund7 crises in 1998. We probably shouldn’t be surprised though if we end up experiencing greater market volatility.
2. 2020 presidential election. A second level of increased political risk is the uncertainty surrounding the upcoming presidential election. Investors may have to grapple with a new set of economic policies and direction from regulatory agencies. The market doesn’t have enough information yet to begin anticipating changes that may come from an election, but as frontrunners become clearer, investors will begin pricing in their best guesses.
3. Increased regulation of technology companies. From both parties, there has been discussion of more stringent regulations on technology companies, which so far have largely evaded the regulatory scrutiny more prevalent in other sectors.8 As the profit margins of technology firms have swelled in recent years9, politicians have considered implementing increased privacy and antitrust laws to mitigate their dominance.
Democratic Senator Elizabeth Warren, for example, has proposed breaking up companies like Facebook, Amazon, Apple and Google10, and increased regulatory attention on tech has even garnered some Republican support from Senators Ted Cruz and Josh Hawley.11 With both parties becoming skeptical of the tech sector, this risk appears to be increasing quickly.
Overall, the market will likely become more volatile as these issues work their way into more and more headlines. Equity markets in the U.S. appear to be fairly valued relative to other assets, such as bonds and real estate. However, we shouldn’t be surprised if for the first time in a while the market starts to have greater day-to-day moves as these issues are sorted out. If you have any questions about your asset allocation going into 2020, please contact your Exencial advisor.
1. Gallup – Most Americans still predict Obama will win 2012 election
2. MarketWatch – Trump president-elect as much of a shocker as stock market’s rally
3. Politico – Impeachment
4. The Balance – OPEC oil embargo, its causes, and the effects of the crisis
5. Investopedia – How the Great Inflation of the 1970s happened
6. Investopedia – Asian Financial Crisis
7. The Balance – Long-Term Capital Management hedge fund crisis
8. The University of Pennsylvania – Regulating Big Tech: Is a day of reckoning coming?
9. Visual Capitalist – How the tech giants make their billions
10. Fortune – Sen. Elizabeth Warren wants to break up Big Tech
11. The Associated Press – Big Tech is now a big punching bag for politicians
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