(James Saft is a Reuters columnist. The opinions expressed are
By James Saft
March 8 A new era in politics has been a
windfall for investors, but the odds are against that being the
end of the story.
The S&P 500 has rallied nearly 14 percent since just
before Donald Trump was elected president, a political
earthquake, as investors, perhaps rightly, focus not on policy
volatility but anticipated tax and regulation cuts and
That may persist, but Trump’s particular brand of politics,
which gives primacy to domestic jobs over trade, has the
potential to cause economic wounds which tax cuts are unlikely
Moreover, Trump’s is just one reaction to a set of
circumstances, notably poor middle-income wage growth, which
affect large swathes of Europe and elsewhere. If politics is the
art of the possible, then investors need to do their sums based
on a much, much wider range of outcomes.
"I'm not sure this is a good thing, but it is a fact that
maybe politics is becoming more important, it's becoming more
intense, the range of outcomes is becoming greater, and that
we're in a world in which there's a bull market in politics
that's getting started," investor and Trump advisor Peter Thiel
said on Tuesday.
Thiel argued that the “tide on globalization is just going
out,” saying that people, goods, services, capital and
information will all face increasing restrictions of movement.
Every single one of those developments will create winners
and losers which can be exploited by investors. So far, U.S.
corporations are popularly deemed to be among the winners.
Every single one will also create new risks, and will also,
over the medium term, tend to suppress growth and push inflation
higher. All else being equal, that should be bad for portfolio
returns, as inflation will lower the multiple investors will pay
for future streams of cash and lower growth simply means smaller
All of this is, to be sure, highly uncertain. That is not
good news, either. Trump administration policy, while following
the broad outlines of what House Republicans said they wanted
last year, is just a very strange bird. We don’t know what
exactly Trump wants, what he will bring his Republican partners
along on, and what the hybrid will achieve. Trade policy is
Beyond a mistrust of collective agreements generally and
China in specific, it is very difficult to know how U.S. trading
partners will react. Will they put up with tariffs or impose
UNCERTAINTY PILED ON IMPROBABILITY
His presidency itself being the result of highly
unpredictable forces which, as in Brexit, are in play elsewhere,
Trump is such a departure from previous norms that it only seems
reasonable to impose some higher margin of safety on a wide
range of assets. This so far has not happened.
Investors should, in theory, demand higher returns in
exchange for taking on greater risks. Price volatility is one
such risk, and one which has diminished markedly since the
financial crisis. As these new and hard-to-predict policies come
into force, expect markets to be more volatile, and eventually,
investors to mark prices down in response.
Given how generally friendly both globalization and the past
25 years of politics have been to capital, it seems likely that
the risks of political change are asymmetrically tilted to the
downside. We’ve seen: lower tariffs, of benefit to capital;
stagnant wage growth, of benefit to capital; and low or falling
tax burdens, of benefit to capital. If those start moving back
towards historic norms - if, in other words, labor captures a
higher share of output - asset prices will suffer.
Boston University law professor James Bessen is notable for
demonstrating that about half the increase in U.S. corporate
profits can be traced to political and regulatory gamesmanship,
particularly in highly regulated sectors like telecoms. If
Trump’s promised campaign to lighten regulation bears fruit, it
will be interesting to see if corporate valuations take a hit.
Lower regulation might also help growth, as investors are now
It is of course possible that deregulation by Trump will be
done in such a way as to protect entrenched interests and assist
in the extraction of rents from consumers. That, sadly, would be
good for asset prices but bad for the general welfare.
Also of interest is a 2008 New York University working paper
which finds that, at least in emerging markets, political risk
does a better job explaining financial crises than market
That is the nub of it: the U.S. and developed markets may
start to behave, and to trade, more like emerging markets than
their old selves. A bumpy ride is the least we can expect.
(Editing by James Dalgleish)