On Tocqueville & the Financial Market Ramifications of the Presidential Election – November 09, 2016

Posted by Guest Blogger Russell Moenich, Sequoia Financial Group, LLC

Way back in 1831 Alexis de Tocqueville, the French diplomat and political philosopher, spent nine months traveling around America under the guise of being on an official government mission to study the American prison system. Most likely bored by his findings, Tocqueville took the opportunity to figure out what the heck was going on with America as it expanded westward while transitioning from an agrarian society to a market-based/capitalistic society (known as the Great Market Revolution) under Andrew Jackson. He took a lot of notes! His findings were published in Democracy in America, a masterful two-volume work that captured the spirit of the day but also the endearing ethos of America. The spirt of this past election cycle, now finally and shockingly over, reminds us of one of our favorite quotes from his work: “The greatness of America lies not in being more enlightened than any other nations, but rather her ability to repair her faults.”
And that’s where we need to focus our attention now, repairing our faults (some exposed throughout the election season) and moving on. President-elect Donald Trump clearly capitalized on the anger of the broader electorate, anger of lost jobs and lost wages as well as the fear of a nation at risk of losing in general. Because of this undercurrent that was not picked up by any poll, we have a “full boat” Republican government: president, Senate and House of Representatives. While rare throughout history, the last time our government was all “red” was back in George W. Bush’s first term that was defined by the 9/11 tragedy.

Capital Markets & Macroeconomics

More powerful than all the Washington power brokers combined, the business cycle will always and everyday have the biggest impact on our investment approach. With that in mind, historically nearly every time there has been a new president, there has been a recession — though correlation does not imply causation. It is not a perfect relationship, but the record is powerful according to the National Bureau of Economic Research: in the 71 years since the end of World War II, eight U.S. presidents experienced a recession during their first year in office. Four presidents — Harry Truman, Lyndon Johnson, Jimmy Carter and Bill Clinton — avoided that fate, although the recession that spanned January 1980 to July 1980 was partially responsible for Carter’s re-election loss to Ronald Reagan. This record also coincides with our working macroeconomic thesis that the current business cycle is getting long in the tooth and likely in its late innings.
That said, the case can be made that the political gridlock during the last eight years has hampered the current business cycle, which has been one of the weakest but longest on record according to Bloomberg. The political hysterics associated with the sequestration and the fiscal cliff kept a lid on government spending once the Democrats lost control of Congress in 2011. While the lack of private capital expenditures has been the biggest contributor to the sluggish business cycle since the Great Recession, the dearth in government spending has made it harder for the economy to reach its ultimate potential. Trump is much more open to increased government spending, such as being very open to new infrastructure investments. If — and this is a big IF — the new administration can find a path to additional fiscal stimulus, it could stimulate economic growth over the current potential level and potentially get a boost from accompanying tax cuts. From a portfolio perspective, accelerating economic growth has tended to favor value stocks over growth stocks.
Trump’s international trade policy position is not as "free trade" as we would like and could be detrimental to global economic growth, and, ultimately, the long-term earnings growth potential of global stocks. He is focused on enforcing existing trade deals, being tough on China, and renegotiating NAFTA (North American Free Trade Agreement between the U.S., Canada and Mexico) based on his comments from the campaign trail. Furthermore, he has been very vocal against the Trans Pacific Partnership (trade agreement with 12 Pacific Rim countries but not China), and is unlikely to support the Transatlantic Trade & Investment Partnership (trade agreement covering Europe and North America).
We do find Trump’s goals of repealing the Affordable Care Act; his plan to reduce regulatory burden generally, regarding areas such as climate change or repealing parts of Dodd-Frank; and his view of allowing states to determine the minimum wage all positive and pro-business.
The Federal Reserve Bank’s expected increase in short-term interest rates scheduled for December no longer looks so expected. And knowing that the Fed kills business cycle expansions by raising interest rates too much, this could be a welcome development as they choose to wait until Trump is sworn in and has greater clarity on the direction of policy. The fear of the Fed has been the market’s hobgoblin for over two years now.
In the very short-term, the uncertainty of what a Trump presidency may look like may weigh heavily on capital markets. Markets may overreact to the uncertainty in the short-term. Of course, it will take time for the markets to digest the changing political landscape and associated policies assuming they even come to pass. We suspect that the bigger macroeconomic trends may reinforce themselves and the uncertainty should wane. Taking a broader view of the election outcome, U.S. equities have displayed consistent patterns in election years (Bloomberg). In predictable election years, stocks continue in a simple up-trend, with the election essentially a non-event. In close election years, like this one, U.S. equities are flat in the months ahead of each contested election given the uncertainty, and then tend rally after … regardless of who wins.


Sure the whole process exposed faults, but perhaps the repairs can begin now. Note that the laws of economics and finance have not been repealed. A broadly diversified portfolio that is focused on long-term investing can overcome short-term volatility in capital markets. And we can find comfort in the fact that whether or not your preferred candidate won, the strength of our great country relies on the ethos that Tocqueville found back in 1831 and things like the checks and balances associated with our system of government, split or otherwise.
Tocqueville one more time:
I sought for the greatness and genius of America in her commodious harbors and her ample rivers – and it was not there . . . in her fertile fields and boundless forests and it was not there . . . in her rich mines and her vast world commerce – and it was not there . . . in her democratic Congress and her matchless Constitution – and it was not there. Not until I went into the churches of America and heard her pulpits aflame with righteousness did I understand the secret of her genius and power. America is great because she is good, and if America ever ceases to be good, she will cease to be great.
Read Cohen & Company’s related article on the election’s potential impact on taxes.
Russell Moenich is the Chief Investment Officer of Sequoia Financial Group, LLC. Contact him at rmoenich@sequoia-financial.com to discuss this topic further or visit www.sequoia-financial.com.
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.
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