Us presidential election 2016 the final spurt has begun

Stefan Kreuzkamp, chief investment officer at Deutsche AM

The economist and Nobel laureate Friedrich August von Hayek once described the markets as a "miracle work" called as they form price signals based on information they gather from millions of people around the world. However, the market signals relating to the 2016 US election campaign are very difficult to interpret.

Anecdotal evidence suggests that political risks are causing increasing concern among investors. This seems understandable. Hillary Clinton, the Democratic nominee, is ahead in the polls. However, she continues to stir controversy, for example over her careless handling of emails during her tenure as secretary of state. Since the beginning of the exhausting election campaign, she has hardly given any press conferences. Meanwhile, your opponent, Donald Trump, has also raised concerns abroad with his skeptical stance on free trade. On other issues, he repeatedly surprises both his supporters (including his campaign aides) and his opponents with rapid changes of position.

Lessons from the past
All this actually speaks for uncertainty. And that in itself should cause nervousness in the markets. But instead, the S&P 500 index is trading near its all-time highs. This seems odd, given that U.S. stock markets have historically underperformed in election years. On average, stock prices have risen 6.5% in election years since 1936, compared with 8.7% in all years since 1933. Since 1936, the S&P 500 Index has typically performed weakly in years with open presidential races in which no incumbent ran for re-election, and has even posted small losses on average.

Of course, such statistical results should always be taken with a grain of salt. The number of election years in recent history is simply too small to draw reliable conclusions. The relationship between the economy and the financial markets is complex and constantly changing. In addition, breaks in the data can be seen when it comes to how electoral politics affect the economy and the markets. Statistically expressed: Numerous non-stationary processes play a role. (Just as an example, consider how U.S. monetary policy changed beginning in 1979 as the Federal Reserve (Fed), under the leadership of Paul Volcker, began to fight inflation in earnest.)

Further volatility to be expected?
To gauge market sentiment, one can look at z.B. Assume that investors are assuming a continuation of the status quo. That would mean Democrats control the White House and Republicans in Congress are strong enough to serve as an effective counterweight. Such a result seems quite plausible for the time being. Democratic candidate Hillary Clinton continues to hold a lead. On average, recent polls had Trump trailing her. Clinton also received much more substantial and sustained support at the Democratic convention in late July than the real estate mogul had received from Republicans a week earlier.

In more detailed analyses, most observers currently conclude, depending on the model used, that Trump has only a small chance of winning, around 33 percent or less. However, such predictions are subject to considerable uncertainties. Polls suggest voters do not find either candidate particularly attractive. Following the surprising outcome of the Brexit referendum, investors are also once again taking a greater interest in risks that are difficult to assess. Investors should keep a close eye on the risks, however. There could be stronger swings in the election campaign than the markets seem to expect. In addition, the key question is which party will win a majority in the House of Representatives and the Senate. This is arguably of equal or even greater importance to investors than the headline-grabbing presidential campaign.

The final spurt of the election campaign begins
The average U.S. voter is usually preoccupied with the presidential campaign from Labor Day onwards (the first Monday in September. At this stage, analysts, fund managers and strategists are also increasingly concerned about what the impact might be on individual assets and sectors. Old hands on Wall Street, of course, know well not to be overwhelmed by the plethora of proposals, debates and quotes. The office of the U.S. president may still be the most influential post in the world, but aside from foreign policy, the president generally relies on congressional support. When it comes to the issues investors care about most, Congress has the power, especially on all fiscal policy issues. The markets have had to experience this painfully several times during Obama's tenure, when there were disputes over the budget and the threat of shutdowns of administrative activity (also referred to as "government shutdown").

The famous checks-and-balances system in the U.S. is just one reason why it is not wise to make long-term investment decisions based on hastily made campaign promises. The Brookings Institution, a Washington think tank, once wrote in a guide to U.S. presidential handovers: "Every new president wants to hit the ground running, but no one wants to do it all alone." Filling numerous positions in government and administration poses enormous logistical problems. This challenge could be especially great for Donald Trump, who is not only running as the candidate of a party that has been in opposition for eight long years, but also as a political career changer. Unlike other newly elected presidents, he lacks an extensive network of policy experts in Washington and beyond. Not only is it unclear what he himself thinks on detailed factual issues that might interest an investor from a particular sector's perspective. It's not even clear who he or his people might consult as specialists in this area. Trump is campaigning against numerous policy plans pursued by previous Republican administrations. As a result, he probably can't easily draw on veterans from previous administration teams (This otherwise happens frequently to make the transition of office go smoothly.) Finding enough candidates for thousands of mid-level jobs who share Trump's worldview is not likely to be easy.

Promises Once and Now
A rough rule of thumb is that a new president's team is firmly in place after about a year, and it can take even longer for important but controversial appointments. It will take time for the new administration to really get its act together. And then the world usually already looks different. Priorities change, and tends to mean that all promises, no matter how clearly stated, must be adjusted to reality (For example, Obama promised z.B. in his first campaign, to renegotiate the North American Free Trade Agreement (NAFTA). He also wanted to restrict Chinese exports because China had manipulated the currency. After the elections, Obama then pursued a largely trade-friendly policy. And George W. Bush campaigned as a "compassionate conservative" in 2000 and promised to stay out of international entanglements.) Therefore, according to Stefan Kreuzkamp, CIO of Deutsche AM, it is still too early to draw detailed conclusions for the economy as a whole or for specific asset classes or sectors based on the campaign so far (Trump has to e.g.B. The President has yet to comment on his tax plans, after the previous draft was recently removed from his campaign website.)

This is something Deutsche AM will be looking at in the coming weeks as it becomes clearer what the two candidates' priorities are likely to be and what their chances are of winning a convincing mandate. Then it may also be possible to assess how likely it is that the Democrats, rather than the Republicans, will win a majority in the Senate or the House of Representatives, although the latter may be less likely from the outset. The House of Representatives majority is of particular importance to investors, as only members of the House of Representatives can introduce bills on tax provisions.

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