Post-election déjà vu for markets?
Mohamed El-Erian
November 7, 2012
Permalink
There is nothing better than the widespread perception of a close election for the full spectrum of “experts” to get carried away with what might occur under alternative outcomes. And carried away they were.
Many argued that the two presidential candidates would implement meaningfully different economic policies and, thus, trigger different market reactions. But now that the election outcome is known, it will soon become apparent that the main risk is that investors’ prospects remain hostage to the same issues that existed long before the election.
In the run up to Tuesday’s vote, many espoused the following three themes with potential market implications – from the most valid to much less so:
1. Distinct approaches to monetary policy: The possible re-election of President Barack Obama was seen to favour more policy experimentation by the Federal Reserve, including venturing deeper into unchartered QE territory. By contrast, a victory by Governor Mitt Romney was seen as signalling a retreat, underscored by his commitment to replace Federal Reserve chief Ben Bernanke (widely seen as the chief architect and advocate for unconventional monetary policies) with someone significantly more hawkish.
2. Different business reactions: A possible Romney presidency was viewed as more accommodating and, thus, more likely to engage into the economy the trillions of corporate cash sidelined by uncertainty. It was also deemed more likely to break the Congressional deadlock that has hindered much-needed agreement on the range of stalled policy priorities.
3. Re-asserting America’s global economic influence: Viewed as more likely under Romney due to his promise to label China a currency manipulator on day one of his presidency, this was seen as a stepping stone to restoring American leadership to an essentially rudderless global economy undercut by disruptive imbalances.
These themes spoke to different market outcomes. Many argued that, over time, a Romney win would lead to losses in bond markets which lost Fed support; bolster equities as the business climate improves and US global power is restored, though partially offset by the reduction in monetary policy stimulus; and strengthen the dollar as both growth and interest rate differentials tip to America’s favour.
Then there were the views of some of us deeply embedded in the feasibility of different policy approaches and their market impact. For us, domestic and international circumstances pointed to a lot less policy flexibility than suggested by the narrative of the two presidential campaigns. As such, we felt that the potential for different market outcomes was exaggerated.
While monetary policy could indeed vary, and despite the soaring campaign rhetoric, we argued that whoever secured the White House for the next four years would inevitably face quite a narrow set of economic policy options (though, importantly, broader scope for social and foreign policies). He would also risk remaining hostage to a deeply polarised Congress, especially when seeking to translate policy design into implementation.
Now, the morning after an expensive and acrimonious campaign, a re-elected President Obama must find a way to get Congress to step up to its responsibilities on economic governance. The election did nothing to heal the seemingly intractable partisan divisions in Washington. In fact, the bitter tone of the presidential contest could well encourage further polarisation.
Continued Republican control of the House and a filibuster-prone Senate suggest that President Obama will need to aggressively follow through on his economic vision while naming and shaming Congressional disruptors even more. This could do more than strategically align citizens’ desire for clear economic direction with their low opinion of Congress’s effectiveness; it could also influence the behaviour of new members coming into Congress (and there are quite a few of them).
While markets wait for this to happen, and unfortunately it could take quite a while, bond and equity investors could well experience a series of “Groundhog Days” – finding that a hyperactive Fed (still struggling to compensate for the paralysis of other policymaking entities) remains their best friend; and that the fiscal cliff, Europe’s debt crisis and Middle Eastern geopolitical risks continue to constitute threats to the asset classes’ favourable correlations and low volatility.
Have no doubt: yes, an enormous sum of money was spent on the campaigns; and, yes, many promises were made as the candidates sought to differentiate themselves. Yet, after an initial flurry, it is essentially déjà vu for investors. They will continue to hope for political sputnik moments while worrying about potential market instability.
The writer is the chief executive and co-chief investment officer of Pimco.
Many argued that the two presidential candidates would implement meaningfully different economic policies and, thus, trigger different market reactions. But now that the election outcome is known, it will soon become apparent that the main risk is that investors’ prospects remain hostage to the same issues that existed long before the election.
In the run up to Tuesday’s vote, many espoused the following three themes with potential market implications – from the most valid to much less so:
1. Distinct approaches to monetary policy: The possible re-election of President Barack Obama was seen to favour more policy experimentation by the Federal Reserve, including venturing deeper into unchartered QE territory. By contrast, a victory by Governor Mitt Romney was seen as signalling a retreat, underscored by his commitment to replace Federal Reserve chief Ben Bernanke (widely seen as the chief architect and advocate for unconventional monetary policies) with someone significantly more hawkish.
2. Different business reactions: A possible Romney presidency was viewed as more accommodating and, thus, more likely to engage into the economy the trillions of corporate cash sidelined by uncertainty. It was also deemed more likely to break the Congressional deadlock that has hindered much-needed agreement on the range of stalled policy priorities.
3. Re-asserting America’s global economic influence: Viewed as more likely under Romney due to his promise to label China a currency manipulator on day one of his presidency, this was seen as a stepping stone to restoring American leadership to an essentially rudderless global economy undercut by disruptive imbalances.
These themes spoke to different market outcomes. Many argued that, over time, a Romney win would lead to losses in bond markets which lost Fed support; bolster equities as the business climate improves and US global power is restored, though partially offset by the reduction in monetary policy stimulus; and strengthen the dollar as both growth and interest rate differentials tip to America’s favour.
Then there were the views of some of us deeply embedded in the feasibility of different policy approaches and their market impact. For us, domestic and international circumstances pointed to a lot less policy flexibility than suggested by the narrative of the two presidential campaigns. As such, we felt that the potential for different market outcomes was exaggerated.
While monetary policy could indeed vary, and despite the soaring campaign rhetoric, we argued that whoever secured the White House for the next four years would inevitably face quite a narrow set of economic policy options (though, importantly, broader scope for social and foreign policies). He would also risk remaining hostage to a deeply polarised Congress, especially when seeking to translate policy design into implementation.
Now, the morning after an expensive and acrimonious campaign, a re-elected President Obama must find a way to get Congress to step up to its responsibilities on economic governance. The election did nothing to heal the seemingly intractable partisan divisions in Washington. In fact, the bitter tone of the presidential contest could well encourage further polarisation.
Continued Republican control of the House and a filibuster-prone Senate suggest that President Obama will need to aggressively follow through on his economic vision while naming and shaming Congressional disruptors even more. This could do more than strategically align citizens’ desire for clear economic direction with their low opinion of Congress’s effectiveness; it could also influence the behaviour of new members coming into Congress (and there are quite a few of them).
While markets wait for this to happen, and unfortunately it could take quite a while, bond and equity investors could well experience a series of “Groundhog Days” – finding that a hyperactive Fed (still struggling to compensate for the paralysis of other policymaking entities) remains their best friend; and that the fiscal cliff, Europe’s debt crisis and Middle Eastern geopolitical risks continue to constitute threats to the asset classes’ favourable correlations and low volatility.
Have no doubt: yes, an enormous sum of money was spent on the campaigns; and, yes, many promises were made as the candidates sought to differentiate themselves. Yet, after an initial flurry, it is essentially déjà vu for investors. They will continue to hope for political sputnik moments while worrying about potential market instability.
The writer is the chief executive and co-chief investment officer of Pimco.
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