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The United States of Checks and Balances

Tuesday, November 13, 2018

And just like that the Trump bounce ended – almost exactly two years after it started. For a change the prediction markets got it right - a Democratic flip of the House and continued control by Republicans in the Senate. Like an overstimulated athlete before a doping committee, the current Trump Administration failed its stimulus (drugs) test before the electorate, who instead voted for more checks and balances in an increasingly divided United States. This has clear ramifications for the investment landscape. Until yesterday, Trump had total control to push through any and all of his ideas through a united Republican controlled government. With a Democratic controlled lower House, things will now change. Stimulus overdosing is now a low likelihood; this is clearly good for the trajectory on which the deficit was previously heading and bond yields are reacting positively to this.

Similarly, the pace of growth will likely moderate from its higher octane burn now that more gridlock is expected. Fed policy might not have to be so restrictive going forward and the four hikes the markets were pricing into 2019 will potentially be scaled back. This anticipation, and the fact that the dollar should weaken from here, will finally provide a boost to emerging markets performance. Administrations rarely try to front load the economy as soon as they get elected but instead wait until the mid-terms to enact major policy changes. Trump, as we know however, is not your usual president and so the peak hype and optimism is now probably behind us – this has implications for equity returns now in the US and we have been increasingly scaling back exposure on this likely outcome.

The biggest risk to US equity markets was always going to be a Democratic sweep of both Houses which would have immediately raised impeachment odds for Trump, so perhaps markets can remain in a holding pattern for now. However with Democrats holding the chairs in key House committees (one of the most outspoken critics of Trump, Maxine Waters, whom he has already Twitter smeared with “Low IQ” insults, will chair the House Financial Services committee and will likely push for more disclosure on Trump’s financial history), we also have the Mueller report findings; so if you can expect anything, it is to expect more fractious cross-party fighting. It remains to be seen whether US equities can ignore this noise.

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The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. Allocations and holdings are subject to change. Reference to a specific security is not a recommendation to buy or sell that security.