For What It's Worth

We are two months away from 2020 and almost exactly one year away from another dreaded presidential election.  The election three years ago seems to have irreparably altered the political landscape of the country.  Division among Republicans and Democrats, inside Washington and on streets and neighborhoods all around the country, is at levels unseen since the Civil War nearly perished from the Earth “a nation of the people by the people and for the people.”  Today, about the only two things we can all agree upon is that we are divided, and we can’t see how this doesn’t end poorly.  If you are like me you probably feel like Rodney King after the Los Angeles riots in 1992, stunned and wondering, “Why can’t we all just get along?”  But if 2016 was a contentious year, it may only be a prelude for what’s to come next.

No doubt about it, election years can be tough on markets.  Financial markets have a passionate distaste for uncertainty.  Last year financial markets had a conniption fit over the uncertainty of Federal Reserve interest rate policy and the trade war with China.  When all the dust settled on 2018, nearly every asset class posted negative returns.  This year, the Fed changed course, undoing all of the 2018 rate cuts, and the markets responded by doing a complete 180. But more uncertainty now lurks ahead. 

The first couple months of next year will most likely be about impeachment hearings and the Democratic Primary.  Love him, hate him, or begrudgingly support him, the impeachment hearings will be a death battle.  And like the Pale Rider of the Apocalypse, hell will follow with it.  If I was a betting man, Republican support for the President will hinge on which candidate emerges as the Democratic front runner.  Should one of the candidates further to the left appear to pull ahead, Trump’s wall of support will fortify.  If Biden appears to be the likely candidate you may see support for Trump, among his party, begin to crumble.  A Biden presidency, for many Republicans, is tolerable; a Warren presidency is anything but. 

Up until now, the stock market has largely ignored the political cannonades in the distance.  Rate cuts by the Federal Reserve, and the belief that world central banks will perpetually backstop the market, has created an atmosphere of Paris in 1916—the front lines are miles away, meanwhile the cafes are still open.  But that could change after the new year.  Bad headlines for Trump, and a Warren win in Iowa, may be the first signs we get that 2020 is not going to be like 2019.  Positive news may arrive in the way of trade war relief, but it would only represent a short-lived reprieve if Warren or Sanders appear as the front runner.  As I mentioned earlier, markets hate uncertainty, and both represent massive uncertainty for businesses in general, and Wall Street in particular.  I’m not laying claim to how four years of Warren will play out, only as to how the appearance of Warren presidency could play out.

There are many fascinating aspects of our shifting political landscape.  One element I was recently thinking about was that the Democratic Party is facing an identity crisis similar to what it experienced in the mid 1960’s.  At that time, Johnson was pressing for passage of the Civil Rights bill which created a massive division in his party.  On one side were the liberal Dems supporting it, on the other were the old-line southern Dems, who’s only remaining connection to the party was that it wasn’t the party of Lincoln.  Similarly, today we see political make ups of both parties shifting.  Many, in both parties, maintain their political allegiance despite the fact that their party’s platform no longer represents what it did 20 years ago.  Democrats are now the party of the rich, as defined by the net worth of the average constituent in their congressional districts.  Yet the majority of the policies put forth in the debates run counter to the socio-economic makeup of their voters and many of their largest contributors.              

If this proves true, and if Warren wins the 2020 election, we could see a collaring of many of the economically divisive issues.  Perhaps this is precisely what the stock market has discounted up until now.  But, if the Dems sweep the election in 2020, the bad blood that’s been boiling over the last few years may be unable to be restrained.  Unfortunately, these scenarios create more questions than answers, which means uncertainty, and there ain’t nuthin’ good about uncertainty in the markets.        

If you are curious about positioning for uncertainty, please read the “Pro Bono” Section of our newsletter or click here.  Thanks for reading.

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