Trying to Balance Good and Evil

When the presidential election is over, investors can focus on what is going on in the world economy and what future investment opportunities are lurking out there. If Donald Trump were to win, the outlook would be very uncertain because of his maverick ideas on both domestic and foreign policy. Though Hillary Clinton’s victory is likely, we should not assume a seamless transition from the policies of the Obama administration. She will focus on infrastructure, improving the Affordable Care Act, job creation, revising the tax code and immigration. The question will be how much of her agenda will she be able to get passed by a Republican-held House of Representatives.

Probably the most important lesson of the last six months is the importance of populism in the political process. A large segment of the population in the United States and Europe believe that their future economic opportunities are limited and they want change from the path being followed by their governments. This discontent fueled the political success of Bernie Sanders and Donald Trump. Populism and immigration reform were the key factors abroad, influencing U.K. voters to leave the European Union. Most observers would agree we are in a period of secular economic stagnation, but the equity market in the United States is near an all-time high and initial unemployment claims are at a 43-year low. If Hillary Clinton wins the presidency, it may not be because a plurality of American voters embraced her policies, but because many were adverse to the prospect of a Donald Trump–led White House. A majority of voters actually distrust her and she might have lost to John Kasich, Marco Rubio or even Jeb Bush had they been nominated.

While we all support the concept of improving infrastructure, the Obama administration actually got very little done, despite being committed from the beginning to “shovel ready” projects. To get infrastructure work implemented effectively and quickly is hard. Although Larry Summers believes infrastructure should account for 1% of GDP, we can’t count on fiscal spending to contribute in a major way to overall economic growth in the United States anytime soon, even if these programs get through Congress. There is also the question of how many new jobs would be created by increased government spending. Given the doubts that exist about the benefits of revising the tax code and modernizing immigration policy, these challenges reinforce the futility of looking to the new administration to get the economy on a much stronger growth path right away.

We do know we are facing some headwinds. The Federal Reserve and other central banks are beginning to doubt the effectiveness of continued monetary expansion as a way to stimulate the economy, despite increased liquidity having been an important factor in driving the equity market higher since the end of the recession in 2009. We are also seeing the early signs of inflation. Both the Consumer Price Index and the Personal Consumption Expenditures indicators are still below 2%, but average hourly earnings are up 2.6%, the availability of skilled workers is getting tighter and inflation could become a negative factor some time during the next year. Rising rates and more inflation are likely to be interpreted negatively by equity investors.