Enough Already
Most clients we speak to express the wish that the election were over already, so they can stop obsessing and get on with their lives, a sentiment we share. We can’t make time pass more quickly, but we can think about the consequences of the election outcome. It is our judgment that interest rates will rise no matter the outcome mostly because of economic forces, not political ones. On the political front, government is likely to remain divided, suggesting that the most radical policy changes that people fear are unlikely to be realized. Nonetheless, both candidates favor increased spending for infrastructure, which may add to the upward pressure on interest rates.
Investors already recognize that a Fed rate hike in December is quite likely and Friday’s employment report only heaped a little more fuel on that fire. Job growth was solid, while wages surged by 0.4% for the month and 2.8% year over year, coherently pointing to a progressive scarcity of labor. Labor force participation had been rising, counter to the secular demographically driven declines. No more. It’s been flat for several months around 62.8%, so the unemployment rate is resuming its cyclical decline. If the labor force participation also resumes its secular decline, the unemployment rate is likely to plummet, rendering labor even scarcer. The jobs data materially strengthened the case for the Fed to hike interest rates in anticipation of inflation exceeding its 2% target far sooner than suggested by its forward projections.
The case for rising interest rates is also supported by the fiscal programs promised by both presidential candidates. Both favor increased spending on infrastructure. Neither candidate argues for deficit reduction as a priority. So, any changes in fiscal policy are likely to be pro-growth and incrementally additive to rising interest rate pressures. The condition of our roads, bridges, airports and other infrastructure facilities more than warrants a substantial rebuilding program, although from a macro perspective, it would have been far better if this had started three or four years ago when the economy was far weaker, unemployment higher, and the need for economic stimulus much greater. The timing is simply off. One consequence will be higher interest rates.
There is no doubt that the two candidates offer very different visions for the economy and markets, so the outcome of the election matters. But it is also unclear what either will wish to or be able to implement, if elected, which elevates our projection uncertainty. It seems doubtful Democrats will carry the House, if Clinton wins. Even if elected, it is unclear that Trump plays well with Republicans. Some additional clarity is (probably) coming on Tuesday. But even then, uncertainties will remain, even though we all wish for increased clarity.
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