Some argue that the political landscape in the U.S.—if not the world—has never been more polarized than since the election of Donald Trump as U.S. President. And according to some senior institutional investment consultants contacted last week, sensitivities and strong feelings one way or the other regarding the Trump administration and its policy agenda are increasingly the proverbial 800 pound gorilla in the room in meetings with clients that none dares to address.
Speaking on condition of anonymity, consultants weighed in with the following observations:
“There’s an interesting intersection between politics and asset management or politics and investment consulting right now (i.e. politics is more polarizing today so we all have to be a good bit more sensitive to investment opinions/theses that are, in some part, derived from geopolitical events). I try to stay as far away as I can from expressing any political opinion in client meetings, but the impact seems more front and center and more abrupt these days,” one consultant said.
Another was more explanatory. “I would say that more care is required regarding how one expresses the events of the day than I can remember—and that is in one’s neighborhood or in the office,” he said. He explained that, for example, his firm provides macro and market charts to clients with commentary, within which it tries to toss in particularly topical items with a standard package it distributes quarterly. “One of those items covered this quarter was the projected Federal deficit and its potential costs. I had the commentary re-written to include the notion that supply-side economics might actually work this time and to soften the observations.”
He said the point is that he believes his firm has to be more careful now than ever before in what it publishes, what it says in its webinars, and what comments it makes to the press and in its client meetings to ensure “we don’t prick the political sensitivities of our audience.”
He continued that his firm has traditionally attempted to be apolitical and neutral across a host of sensitive topics, but that “currently so much of what is going on government-policy wise that may influence capital markets in the near term is driven by what appears to be uncertain and inconsistent messaging; it is very difficult to walk that line without upsetting somebody.”
He acknowledged, nonetheless, that in the end earnings drive markets over the long term and there has been much academic literature supporting the notion that the impact of a White House occupant upon that variable tends to be substantially less than market participants might expect. For instance, Nixon quit, Clinton was impeached, and yet life, investments and investment markets motored on, he said. “Similarly, 9/11, terrorism, conflicts in the Middle East, and we keep moving forward.” Indeed, as if to underscore that point, President Trump’s controversial decision last Wednesday to abandon a nuclear deal with Iran didn’t appear to faze investors—the DJIA gained 182.33 points or 0.8% that day.
Some market observers maintain, however, that the withdrawal of the U.S. from the Iran nuclear agreement has the potential to rattle oil markets, which are already at their highest price in years, and renewed sanctions against Iran could push oil prices even higher. They note also that rising interest rates still have the potential to upend markets, while political risks, whether from trade tariffs or North Korea, have not fully abated and could flare up again.
I try to stay as far away as I can from expressing any political opinion in client meetings, but the impact seems more front and center and more abrupt these days.
But there are two very major concerns he has that don’t seem to be being addressed in Washington today, he observed: first, debt levels are increasing across the board as the U.S. continues to write IOU’s for the next generation, while the Boomers go into slow down and payout mode. “Eventually, à la ‘08-‘09, this could end badly,” Second, there is a certain inevitability to the ascension of China as a world power economically, politically, and militarily, he said. “The tide of China and other emerging markets—India and Brazil, for example—will rise and some of that ascension will just as inevitably be at the relative expense of the U.S. We have to figure out how to have our boat rise with them as opposed to clinging to some imagined return to a past that is just that, past.”
According to one pension fund board member who happens to be a Republican, “As a Republican, I’ve been frustrated at how readily fellow Republicans have touted the great benefits of last year’s tax cut (not reform) package, ignoring many nonpartisan and credible sources that indicated that the future GDP growth rate needed to offset the deficit impacts from the tax cuts is higher than we’re likely to see in reality. In other words, that tax cut package has (in the minds of many republicans) great short-term benefits that they are happy to extoll, but likely also presents many negative consequences in the long term that those same folks are happy to ignore.”
He continued, tellingly perhaps, that “You’re speaking to real issues, but I don’t see these conversations cropping up in my work as board member over these portfolios to the extent that it’s been uncomfortable for anyone.”
“The discipline of prudent and fiduciary asset allocation and management cannot allow for the taint of economic assumptions over-tilted by partisan leanings or extreme ideologies. Fiduciary obligations require that we focus on the empirical, accessing a cross-section of capital market expectations, while hewing to conservative assumptions best positioned to protect the interests of beneficiaries,” said David Damschen, CTP , Office of the Utah State Treasurer, declining further comment.
A third senior consultant was much more succinct when asked to comment on this story’s premise: “A consultant can’t allow his/her own political preferences to find their way into our advice or view on the markets. It is correct to say the markets positively responded to the tax cuts, but not appropriate to say if it is good policy,” he sniffed.