Four years ago, we inaugurated our new publication, Confero, in the shadow of President Barack Obama’s second inauguration. We believed it was timely and appropriate to review the outcome of President Obama’s re-election to the presidency, working with a new Congress and the likely impact for investors. Four years later, we believe it is worthwhile to revisit the topic, evaluate our 2012 predictions and, if possible, consider what effects the 2016 election may have on the economy.
Verified Predictions from 2012
We were heartened to reread our article from 2012 and note that the majority of our predictions were correct.
- Here are statements we made in our 2012 article that were ultimately confirmed over time:
- Federal Reserve Chair Ben Bernanke signaled he would stand down in 2014;
- Bernanke’s replacement would be FOMC member Janet Yellen;
- The “dovish” monetary policy, accepting higher inflation in an attempt to maximize employment, would continue;
- Obamacare would stand unchanged;
- Challenges to Wall Street Reform and Consumer Protection Act (i.e., Dodd-Frank) were limited, and the law would persevere without the threat of repeal;
- The expansion of domestic fossil fuel energy would continue without interference from environmentalists.
We feel these statements and predictions are essentially true, with a few caveats. First, we argued several laws and regulations would continue without challenge. To be more accurate in our prediction, we should have noted potential challenges would be deferred at least until the next election. Second, some of these predictions are generalizations. For example, environmental activists in the Democratic Party were able to impede some projects, like the Keystone XL Pipeline, but there is substantial evidence that U.S. fossil-fuel production, particularly natural gas, expanded greatly over the past few years until saturating the market.
Mixed Results from 2012
Westminster Consulting did not make an overt prediction about some outcomes, but instead let the burden fall to our contributing sources. For example, there was a disagreement about the 2013 fiscal cliff negotiations. Two of our contributors believed the required spending cuts and tax increases would be greatly damaging. ING worried fiscal cliff results would be enough to push us into recession, while PIMCO saw GDP losses in 2013. JPMorgan took a more optimistic tack, suggesting we would be able to negotiate a last-minute deal to avoid the worst outcomes. The ultimate deal, signed by President Obama on January 2, 2013, left several elements unsolved but it did bypass the worst-case scenario, solidify Bush-era tax cuts for the middle class, retain unemployment benefits, and raise revenues through estate taxes and payroll tax increases.
The 2012 Prediction with a Potential Contradiction
While we feel most of our predictions and declarations were justified, there is a statement we made that hasn’t corresponded to the upward equity markets over the past six months or so.
Here is a statement we made in our 2012 article:
“As a rule, markets hate uncertainty. At a basic level, uncertainty is what investors suffer through to warrant a return on their investment. … It is hard to derive a logical price for a security if the inputs to a pricing model (e.g. — tax rates, projections for GDP growth) are unstable.”
So, the first element of our potential contradiction is an argument we made in 2012, suggesting markets prefer clarity to uncertainty. For our second element, let us consider the American people’s choice for president: Donald Trump or Hillary Clinton. We have long argued Donald Trump was the choice for greater change and potential uncertainty. Hillary Clinton represented a likely continuation of President Obama’s policies, while Donald Trump promised to tear down the status quo, “drain the swamp,” and start over. For the third element of our contradiction, let us consider the fact equity markets moved almost immediately higher on the President Trump’s election and have been hitting new highs over the past several months. The optimistic “Trump Trade” over the past six months has been a triumph of investor consumer confidence and sentiment over vetted and specific policy proposals.
We understand each of these three elements is an extreme simplification. There were many criteria voters used to weigh their choice for president. There its an overwhelming number of factors that can influence market direction, many which have nothing to do with government. Trying to derive a logical argument based on all three elements is dubious at best. Still, in broad terms, these three points create a contradiction. President Trump represents change to global established order. Investors have been hopeful for positive changes coming from his legislative agenda rather than frightened by the uncertainty he might bring to the economic environment.
At least this simplification of the “Trump Trade” had been true thus far. At the time of writing, May 17th, the market is down several hundred points as the market absorbs President Trump’s latest troubles (involving FBI Director James Comey, classified information being released to Russian envoys, and so on).
Fewer Contributors Are Willing to Make 2016 Predictions
Each edition of Confero is built on a theme, such as pension benefits, participant experience, and so on. It has never been difficult to get contributions for Confero by declaring our theme to a set of potential contributors and asking for article submissions. We have done this successfully since the beginning. Although Confero magazine was brand new and completely unknown in 2012, we were able to conduct extensive interviews with leading market strategists from nationally known firms as part of our research efforts from the first edition onward. Since then, Confero has grown its circulation to thousands of readers, industry professionals and fiduciaries alike. Moreover, we maintain constant communication with a number of firms
– investment managers, consultants, actuaries, attorneys, broker-dealers
– looking for contributions to our quarterly magazine.
Given these advantages, getting article submissions should be relatively simple. We were able to assemble a fantastic group of industry thought leaders for this issue, but it was certainly more difficult. When we announced our theme as a revisit to Washington D.C.’s impact on the market, contributors were much more reluctant to tackle the subject. Washington’s impact on the market is hardly a taboo topic; we have done it before. We all accept the relevance and potential impact of the new administration on investors; the market has moved up in double digits since naming Trump the next president with complete Republican control of Congress, even without any immediate changes to policy. Predictions and market forecasts based on economic fundamentals are still common. Our first monthly article for the year always includes a table with a dozen year-end market predictions. In a world where advisors and consultants can wax lyrical about the driest of topics, why would it be difficult to attract contributors? How can Westminster Consulting and its contributors allot pages to obscure legislation regarding pension plan funding obligations, but not find willing contributors to comment on the historically unprecedented, attention-grabbing outcome of the 2016 election and how it might impact the market?
We understand one reason for the reticence of contributors to tackle the topic: timing. In 2012, market analysts and pundits had a stable framework of decision-making trees, known players, and likely potential scenarios to work from. As such, Westminster Consulting was willing to make predictions about President Obama’s second term with accuracy, informed by history. In contrast, President Trump is an outsider whose policy positions were often scant with details. Naturally, potential contributors wanted to wait until there was evidence of his behavior to draw inferences upon. The hope was, once things quieted down, you might see a pattern emerge in the behavior of key players.
After a month of President Trump and the new Congress, Westminster Consulting posited an operating framework for the new administration in our February monthly article, “The Dust Settles.” In summary, we argued that the president’s swift executive actions might matter politically, but most policy decisions that affected the economy and investor outcomes would still occur at the (much slower) pace of Congress. The president has the ability to excite investor sentiment in the short term with hopes of huge tax cuts or amazing health care reforms. Similarly, the president could negatively shock markets with fears of trade wars. However, there are institutional checks-and-balances that have already thwarted some of the president’s actions. Long-term outcomes are a function of applied policy and economic fundamentals, which is the primary purview of Congress, not the president. In our estimation, the sitting president is a secondary matter to economic growth and, ultimately, investor outcomes. Several months later, we still feel comfortable with this long-term generalization while we acknowledge investor sentiment can swing the market drastically in the short term.
That is our position, but other market analysts may disagree with our line of reasoning. Other analysts may believe the president’s policy goals are given higher priority in Congress and will supersede competing legislation. They may argue a president’s influence on investor sentiment is important because it can create a virtuous cycle of optimism and expansion or, conversely, a vicious cycle of pessimism and retraction. As such, the man sitting in the Oval Office is a primary factor that influences the economic and market outcomes.
For analysts who believe the president a key component to economic outcomes, it is critical to establish his likely positions. However, after four months of this administration, there are still questions about what policy positions the president may take. Moreover, there are questions as to whether the president can complete his first term or if the mounting questions may slow down his prospective legislative agenda. At the time of writing of this article, mid-May 2017, several betting sites have substantially increased their odds that President Trump will not finish his first term due to voluntary resignation. This fact might explain the unusual reticence of analysts to make predictions about the 2016 election’s impact on the markets. Even after four months with the current administration, there are many unknowns to risk an unfounded prediction upon.
Gabriel Potter is the Senior Research Analyst at Westminster Consulting.
He can be reached at email@example.com or 585-246-3750.