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WHEN THE DUST SETTLES

The dust hasn’t actually settled, and we’re due for a few more dust-ups before the Presidential election outcome is known. I, along with many others, have posited that the path to winning the U.S. Presidency is straight through the heart of the independent voters. Roughly speaking, the electorate is split into 30% Republicans, 30% Democrats and 40% Independents. The partisan stalwarts will predictably vote along partisan lines. This means the hearts and minds of the independents will drive the final outcome.

In 2016, Hillary Clinton was a flawed candidate who decried the “basket of deplorables”. This quote, among other issues, led Donald Trump to become President. In 2020, suburban voters, minority groups, and women saw President Biden as a better alternative and Trump was defeated. Given the obvious decline in Biden’s mental acuity, Trump was polling very well against him, until Biden was pushed out. By many well-regarded polls, and I know that polls are often quite misleading, this Presidential race has become…a true race.

So, what does this mean for markets and the economy? Regardless of who wins, the day of reckoning with debt and deficits may finally force some action with respect to spending. The markets were loving the “Trump Trade” because it was widely felt that Trump would defeat Biden, extend tax cuts, slash regulation, raise tariffs on foreign producers, and provide a tailwind for the American economy. A Harris Presidency would likely look to roll back the tax cuts, increase entitlement spending, and ease tariffs on foreign producers. In general, a Harris Presidency would be less friendly to the markets given tax and spending priorities. Perhaps the best outcome would be a divided House and Senate that could cause the type of gridlock that markets love. In this environment, the President and the two houses of Congress would be locked in combat and the legislative gridlock would do little to upset the status quo.

The notion of structural gridlock was always welcome, but that changed under President Obama when he famously stated that he had a phone and a pen and would govern by executive order. Now, many of these orders often get litigated and ultimately overturned. However, the damage that can be wrought by the notion of executive order on say, a spending priority or forgiving student debt, can have market ramifications and increase volatility.

Ultimately, I think the chief product of this election cycle is going to be volatility. People will extrapolate poll numbers, swing states, and political rhetoric. By extension, a winner will be forecasted, and their attendant legislative proclivities will then also be forecasted into the future. You get the idea.

I come back to the notion of the two types of risk: price volatility and the risk of permanent loss. Price volatility feels really bad, though experiencing true realized permanent losses not only feels worse but actually is worse. The increased volatility will call for my patient investing to not only try to read the tea leaves, but to make sure tea leaves are actually being read! A volatility dust-up is likely going to be with us through the election.

This commentary has been prepared by Knights of Columbus Asset Advisors (“KoCAA”) for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions and information expressed herein reflect our judgment and are subject to change without notice. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and regulations, and (6) changes in the policies of governments and/or regulatory authorities.

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