Risk Focus: Domestic Politics

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Nov 20, 2019 3:37:56 PM

and tagged Politics and the Economy

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domestic politicsWhen you read the papers and watch the news, you won’t see much about economics. With earnings season just about over and with the major economic reports looking a bit better, investors don’t have a lot of data to worry about—at least until the next set of releases. Instead, now we are worrying about politics.

Will the government shut down?

The big event that could shake markets in the next couple of weeks is a possible government shutdown. Congress has not passed the regular appropriation bills to fund government operations, which were needed as of the new fiscal year on October 1. Instead, it passed a stopgap bill to buy some more time. Of course, we’re now going through the impeachment hearings, and that temporary funding bill expires on Thursday. The House just passed another stopgap bill, which would keep the government open. It is likely—but not certain—to pass the Senate. The problem is that almost all House Republicans voted against the measure, and the Senate is controlled by the Republicans. We will see what happens. The likelihood is that the bill will pass and extend the drama. A possible shutdown remains a real risk, however. If it happens, it will rattle markets and potentially hurt growth. A potential shutdown is something to be aware of, and it isn’t on the public radar screen as much as it should be.

Impeachment risks

The other big thing, of course, is the impeachment process, which is very much on the public radar screen. Although there has been no market impact so far, with markets moving to new highs, the potential remains. The most immediate risk is that the impeachment process could result in a government shutdown (see above), as both parties try to use it as a negotiating tool. Looking a bit further out, the trial in the Senate—if President Trump is indeed impeached by the House—is almost certain to generate market-moving headlines. One more thing to pay attention to.

The long-term view

So, how much attention is warranted when it comes to these political risks? Not really all that much. We need to be aware of these events and alive to the market implications. We can certainly expect some volatility. Looking at the longer term, though, it is even more important to realize that the volatility is likely to be short term.

The last government shutdown, for example, generated both headlines and volatility. Ditto for the last impeachment. Both were damaging, in the sense that both business and consumer confidence were hurt, which slowed growth for the economy and the markets. The damage, however, was short lived, and the economy and markets bounced back and moved on.

This time would be similar, with some volatility and a rebound, unless the damage was sufficient to actually turn confidence and growth down. It could happen, as both are already weak. Even if that were the case, though, we would see it in the data and have time to react. Big economic changes happen slowly, not quickly. So, the fear around the headlines—that things would fall apart quickly—simply has not been, and would not be, true.

This too shall pass?

Looking at the other side of this risk, in fact, you can make a good case that once the impeachment is resolved (one way or another), the reduced uncertainty will act as a tailwind, and that trend would improve. This is another reason to wait and look at the data, rather than assuming the worst. As always, we need to be aware of the headlines but also be aware that headlines pass.

There are indeed real political risks pending, but nothing that we as investors will not be able to navigate around. As is often the case, Winston Churchill said it best: “When you’re going through hell, keep going.” Remember that sentiment as the headlines hit.

One more note: I am now asking for nominations for the Bubble of the Year Award (i.e., the “Bubby”) for the third year in a row. The last two winners have been bitcoin and the marijuana industry, and they are both very strong contenders this year as well. I am hoping you, the readers, have some more good ideas. Send them in by leaving a comment below!

Upcoming Appearances

Tune in to Bloomberg Radio's Bloomberg Businessweek on Friday, February 28, at 3:45 P.M. ET to hear Brad talk about the market. Stream the show live at https://www.bloombergradio.com/, listen through SiriusXM 119, or download Bloomberg's app, Bloomberg Radio+.

Tune into Yahoo Finance's The Final Round on Thursday, March 12, between 2:50 and 4:00 P.M. ET to hear Brad talk about the market. Exact interview time will be updated once confirmed. Watch at finance.yahoo.com

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