At the time of this writing, Election Day is three weeks away. And by the time you read this, we may have a pretty good idea how it will all turn out. It was a historically nasty presidential campaign with plenty of mud slung all along the way. Needless to say, I'm glad it's coming to an end. But now it’s here and we can start to understand more clearly what could be on the horizon. How will this impact the relatively stagnant economy? Will policy shifts surface or will the status quo persist? We have many questions to which we won’t know the answers for some time. It all seems quite precarious at the moment.
I recently spent some time walking the streets of Berlin, in a country with a near century long history of being at the heart of radical political gyrations. And around nearly every corner, I'd find something new to cause me to pause and ask: really, people actually believed that? As is often the case, what starts out slowly with only a few changes and restrictions, eventually grows like a cancer until it's out of control.
Germany is not alone here. Over the past century, we've watched as other regions around the globe have been dramatically changed. Wars and revolutions in Europe and Russia, the great division between India and Pakistan and economic migrations from Africa. The participants looked stunned on camera that this was happening to them. Most were unprepared or perhaps unaware of the consequences that eventually befell them.
Keeping Tabs On Our Own Economic Health
Every week and every month, we receive the lab results on the current health of the U.S. economy. I wish it were as easy as seeing low levels of this chemical or that hormone in our datum—a quick prescription and we're as good as new. But the interpretations of the full body scan of the economy aren’t so clear or easily diagnosed. And while certain members of the Federal Reserve have suggested a December rate hike should occur, other members clearly think it's better to hold steady. At this point, the likely size of any move, even just a quarter of one percent, feels like the cost of a bottle of water in the midst of a high price dinner. The markets are sure to see otherwise.
The wild card in all of this can be found in the White House. Scanning the global press yields some considerable concern over the attitude of both major party candidates on free trade. With the example of Brexit staring us all in the face, and past memories of Smoot-Hawley (legislation that contributed to the Great Depression), I hope that whomever wins does not make good on any major changes in global trade arrangements.
In terms of other changes, well, I can safely say it's all clear as mud. Will either new president continue with the politics of today, while being handcuffed by Congress? Or will there be real significant change? Investors understand that there is no such thing as certainty in the markets. We'd all be well above average like the residents of Lake Wobegon if that were the case. However, I think the situation in the markets today reflects a severe lack of consensus about where this 2016 presidential election will take us.
Gauging the Pulse of Today's Market
What’s more clear is the reaction by the market to comments from the Fed on potential new rate hikes, as the 10 Year Treasury Note has moved from around 1.60% to 1.80%. While higher, this is still below the 2.00% figure from last December when a rate hike also loomed. By the time of the actual rate hike, the yield had moved to 2.35%, and then subsequently fell throughout the year as economic activity continued to bump along. Not a lot of confidence there.
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Board of Governors of the Federal Reserve System (US), 10-Year Treasury Constant Maturity Rate [DGS10], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DGS10, October 24, 2016.
So what might the Fed do in the event our economy was to slip back into a formally defined recession? Right now, we're growing, albeit at a snail's pace, and as slowly as I've ever witnessed in my professional life. It's uneven and is not balanced throughout the economy, but there is growth. And it will likely be a decade or more before the analysts are able to sort through all the sordid details and figure out what's really been going on since 2000.
At a recent breakfast hosted at the St. Louis Federal Reserve, I posed the question about policy alternatives in the event of another recession. The unequivocal answer “more asset purchases,” but in no event equities. So at least that concept will remain constant.
Right now, I'll have to stick with my viewpoint that the economy will bump along until some external force contributes to a change good or bad. This may be political which translates to policy changes, or something beyond our control. I'll tune in for the election results to begin to plan for 2017.