Peak Political Uncertainty

Never in my investment career can I recall political “happenings” carrying so much weight in daily market movements. Today’s markets are whipsawed by political slings and arrows, often in the form of tweets or breaking news reports. And “investors” increasingly are reacting impulsively to a reality that’s shifting minute-by-minute. Put differently, broad swathes of equities can flip from winners to losers in an incredibly short time period — perhaps in the wake of a single tweet.

We believe politics inordinately captures the market’s attention because it’s the only reason that a recession could ensue in the coming months. Absent a policy mistake, our research continues to show few fundamental reasons for the U.S. economy to fall into recession — at least from a traditional economic cycle perspective. Ultimately, easing or escalating political risk could be the x-factor that pushes us further into an economic expansion or slips us into a future recession.

We believed the economy was following a predictable path, like economic cycles of the past albeit at a slower pace. And even with the recent uptick in political noise, if you “listen” closely, you can still “hear” a normal economic cycle ticking in the background. Workers are collecting real wage gains, business investment is stirring (though slowing) and productivity has arrived to the party. This formula has been the secret sauce to the strength and longevity of previous economic cycles. However, these positive developments are increasingly at risk of being drowned out by heightened political uncertainty: Brexit, the U.S.-China trade war, and now impeachment proceedings to name a few. While our research points to expanding but tempered economic growth, we acknowledge that recession risks are rising.

Record Levels of Political Noise

Throughout my career, I have heard many investors haphazardly repeat the refrain that “this is a particularly uncertain time”. I tend to sarcastically respond that I have yet to live in a time of certainty. However, over the past few years, researchers have identified objective ways to measure “uncertainty” magnitudes. As you might expect, uncertainty readings are currently at extreme levels. Turns out, this is a particularly uncertain time.

The U.S. Economic Policy Uncertainty Index quantifies uncertainty by counting the number of articles in the 10 largest U.S newspapers that contain terms, such as uncertain or uncertainty, economic or economy and one or more of the following terms: Congress, legislation, White House, Federal Reserve, regulation, deficit. The article must contain terms in all three categories to be included. Reviewing this data back to its 1985 inception shows that the index hit its third highest level in August 2019, just below the all-time high set in January of this year. Indeed, the past 12 months have witnessed record uncertainty, with the U.S.-China trade war playing a central role.