Political risk has always been frustrating for investors. We like the rules of the game to be known and the playing field level. Any kind of uncertainty leads to volatility in markets. While many believed that the Republican sweep would deliver pro-growth initiatives, Trump’s troubles have led to concerns regarding those outcomes.
The U.S. is not alone in this current environment of political uncertainty. Corruption allegations surfaced against Brazil’s President. Both the Brazilian stock market and its currency tumbled on the news. Brazil’s economy has been much weaker than the U.S. economy and their government has been battling widespread corruption for the past several years, making for a more tenuous situation than that of the U.S. It remains to be seen if this news will reverse the progress that Brazil has made on their economy over the past six months or so.
How do we handicap events such as these as investors? Put simply, the economy. To date, the U.S. economy continues to rebound in the second quarter, and earnings have been stronger than expected. We continue to believe stocks have room to grow, but clearly the best is behind us for this cycle. Since the election, the market started to discount a lot of good news from Washington D.C., and much of that agenda appears to be under a cloud. Maybe it will happen, but the odds of tax reform and infrastructure stimulus are lower for this year.
If political events begin to drag the economy down, we would become more defensive in our portfolios. Confidence, employment and PMIs are indicators that we will focus on for negative warning signs in the economy. At this point, it is too soon to tell if current political events will have any lasting effects on the economy, and in turn, the market.
Takeaways for the Week:
- Despite recent political headlines, we have not changed our cyclical positioning in portfolios
- Over the long-term, the economy and not politics, drives capital markets