Financial Markets Also Need Republicans

Market Trends - 25/10/2016

Global financial markets are intrinsically uncertain. But one thing seems clear – a broad gamut of assets will do better if Democrat Hillary Clinton is chosen for US President in the upcoming elections. However, if history is any guide, investors need to also root for the Republicans to hold onto their majority in the US House and Senate.  In a study conducted by Credit Suisse, analysts looked all the way back to the 1920s to find what political arithmetic was most favourable to US equities, and by extension, markets around the globe. Stocks have historically outperformed when a Democrat presided over the White House as Republicans controlled both the chambers of Congress.  Equity markets also turned in better results when the incumbent party retained control. Dissecting the two-years beginning each January after a presidential election, the study concluded that the S&P 500 median returns were better (18.90%) when status quo was maintained both at the Oval Office and the Congress, compared to a change in regime (11.00% return).

However, what was less clear was the effect a Trump or Clinton victory would have on the US Federal Reserve and the subsequent monetary policy. Although Chairwoman Janet Yellen's term at the helm will not end until February of 2018, her tenure has come under fire. Clinton has had little to say about the Fed and the current lethargy in tightening interest rates. Trump on the other hand has been publicly critical of Yellen, leading to investor speculation about the independence of the Central Bank and the fate of Yellen if he were to be elected.  Several leading economists warn that Trump’s vitriolic could upset the financial apple cart. The two previous Federal Reserve Chairs worked effectively for presidents of either of the two parties. As such, bringing politics into the inner-workings of the Fed could set a dangerous precedent for an institution that has historically claimed independence.


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