Investment Insights: Political battle royale
This weekly report presents insights from our Global Investment Management team.
Investors and markets alike seemed to yawn at the now typical annual event known as the U.S. government shutdown.
Over the weekend, the media began its frenzy of reporting in the capitol and the NASA space agency even sent out a tweet canceling public activities and events until further notice. However, the threat of hundreds of thousands of federal workers that were placed on furlough and a concession between Senate parties pushed Congress to adopt a short-term spending bill, ending the shutdown after just three days. Stock futures over the weekend showed that market participants were barely perturbed by the shutdown and the S&P 500 Index gained 0.81% on Monday as lawmakers kicked the can down the road.
Financial debates have riled both sides of the aisle, but the cornerstone of the deliberations actually revolved around something completely unrelated to the federal budget: immigration policy. The main compromise between lawmakers was to allow for an immigration vote in the coming weeks over “Dreamers,” or young undocumented immigrants that fell under the Deferred Action for Childhood Arrivals (DACA) immigration policy. The fate of those individuals has now been tied to the annual budget, which is set to be voted on again after the stopgap extension expires on February 8.
Trade negotiations continue to be another major factor and potential risk for markets that sit in the hands of legislators and the government. The sixth round of NAFTA talks started this week with little progress being reported from prior meetings. In a blow to those negotiations and to other U.S. trading partners like China and South Korea, President Trump decided on Monday to impose a lofty four-year tariff plan, up to as much as 30%, on solar panels and washing machines made abroad. American solar manufacturers and some industrial companies jumped on the news, but their counterparts abroad had mixed results. South Korean-based L.G. Electronics dropped over 4% before recovering; according to Bloomberg and the International Trade Commission, over 80% of U.S. solar installations use imported panels, a majority of which come from Asia. While the move attempted to bolster domestic businesses, some projects may be put on hold as panel prices and costs rise. According to the Solar Energy Industries Association, almost 9%, or 23,000 jobs, of the American workforce in the sector may lose their employment due to the new import taxes.
Geopolitics remains a key consideration for the financial markets in the current environment. Our team continues to hold a slight overweight in equities as we anticipate stocks to outperform bonds and some alternatives this year; however, we have tempered our longer-term expectations for equity market returns due in part to the outsized gains investors have earned in recent years. A rise in inflation in 2018 and an overall tightening in global monetary policy are things on our list to look out for, but U.S. politics may be the most eventful for markets. Predictions for a Democrat-led House after this year’s congressional elections are becoming more common and may result in a significant shift in the U.S. political landscape.
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International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.
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