It is hard to say whether the markets are considering re-rating the certainty premium we reaped in the six months since the US elections or just slipping into the Summer doldrums.
Immediately prior to the election one of the scenarios we put forward was for markets that would be calmed by the status quo of a Clinton Presidency, but with the risk of being roiled by constant investigations and hearings. Regardless of where we sit politically as observers of market behavior, we can generally agree that a Washington DC consumed by palace intrigue would not contribute positively to market performance, particularly a market waiting for trade, tax, banking, securities and other reforms. Nearly twenty years ago another Clinton was in DC’s crosshairs, and markets fell in anticipation of the unimaginable in the Starr report only to fully recover once the unknown was known and the impeachment proceedings were under way.
Hillary Clinton did not win and despite it being a popular campaign trope the chants of “lock her up” have largely receded and with them the worry about Benghazi and email servers ad infinitum. Equities have climbed on the hopes of a logjam cleared with the Republicans consolidating power. There is little to no agreement on the long-term economic, societal and environmental benefits or detriments from each of the various legislative and regulatory proposals, but investors have traded the market up on the hopes that at least conditions were right for DC do to something. Anything.
Whether it is self-immolating behavior on the part of President Trump, or just DC doing what DC does best, the uncertainty is back with a vengeance. Within Republican ranks there is wrestling for position and influence among the various factions, such as the Freedom Caucus, which has come at the expense of the ambitious legislative calendar of healthcare, tax and other lawmaking and breaking. With a typhoon of controversy swirling in and around the White House, DC’s focus now seems to be on choosing sides and arming for battle.
We now have a Special Prosecutor and the possibility of months, even years, of doing everything but legislating and governing. Markets have succeeded the last several years almost in spite of Washington DC producing little of lasting merit. We remain pro-equities, but our question right now is whether the US market will continue to pay the Trump premium because the much sought reforms are delayed but still within grasp, or if this is truly the shape of things to come, nothing of substance gets implemented, and risk capital flows to more hospitable climes.