Full Swing

The winner of last week’s debate may be inflation. After the dust settles, this conclusion of what could described as a hot mess ends up being bond-negative from a supply and inflationary perspective. The initial reaction from the markets is that Trump will usher in lower corporate taxes, and equities rallied. However, rising rates are not favorable for equities, and could shift major asset flows into commodities, further fueling inflation. 

We tend to steer clear of politics for one main reason: it's contentious, more so now than in recent memory, or, using a favored phrase from one of the candidates, it’s the worst in the nation’s history. However, when a question about the ability to lead over the next four years devolves into golf handicaps and a challenge among octogenarians about carrying a bag over 18 holes, we must comment. The world is at the doorstep of major technological disruption against a background of serious geopolitical challenges. The choice of the U.S. presidential candidate also carries stark implications regarding immigration, tariffs,  tax policy and even the issue of Fed independence.

Our country is at a crossroads, facing divergent economic outcomes depending on which administration enters the White House in January. What was a tight race going into the debate caused companies to wait for visibility on the winner of the race. The betting markets showing a huge advantage to Donald Trump that appeared only minutes into their debate may clarify the picture. However, President Biden’s performance may have worsened visibility by introducing uncertainty about whether he would survive the Democratic convention held on August 19-22. This uncertainty underscores the significant economic implications of the election outcome.

We deserved a motivating vision of where our country is headed, and we received anything but.  We do not believe we are partisan by admitting we left that debate feeling very unsettled. Neither do we believe it is a stretch to conclude many others feel the same, and that fact will further depress consumer confidence. If nothing changes into the November elections, markets will probably begin to discount that immigration flows will contract, pressuring the labor supply and placing upward pressure on wages. An increase in tariffs, not only for China but on European imports, will increase goods prices in a further move away from globalization. While one could argue that keeping individual tax cuts from expiring and lowering corporate taxes is stimulative, it will further increase the budget deficit—even more than the budgetary damage that another Biden administration would inflict. This tale is not over, but markets will begin to vote before November.

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