Gulf News

Brexit couldn’t do it, step forward the American voter

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The “dog days” of summer have shown their teeth. Last week we saw some action on the S&P 500 at last. But this doesn’t feel like a real correction.

It’s worth rememberin­g that not even a surprise like Brexit could knock equity markets off course. What set off last week’s wobble?

Dovish Boston Fed Chair Eric Rosengren telling us there was a “reasonable case” for a rate hike and that ducking it could delay the economic recovery. Theories circulated that Fed board member Lael Brainard, another dove scheduled to speak three days later, was there to soften us up for a hike.

The Fed false alarm:

In her remarks, Brainard stayed with her dovish instincts. Fed Funds futures went from pricing in a 24 per cent probabilit­y of a September hike to 15 per cent — lower than before Rosengren spoke. The S&P 500 bounced 1.5 per cent, led by the high-yielding stocks that had sold off in response to Rosengren.

And so then we’ll turn to the third quarter earnings season. Current expectatio­ns are for a flat quarter.

Before December, we have the small matter of a US presidenti­al election. With Labour Day behind us, the campaign is beginning to impinge on the market’s consciousn­ess just as it is on the minds of voters at large.

Election polls are tightening:

We can see that in recent opinion polls. A month ago, the New York Times analysis of state and national polls put the probabilit­y of Hillary Clinton winning the White House at 85 per cent. Since then, a surge for Donald Trump has pulled that back to 76 per cent.

The latest national poll average has 44 per cent of voters opting for Clinton and 42 per cent for Trump, but the Electoral College math, which makes it more important to win in certain states rather than others, still favours the Democrat.

One key state to watch is Ohio, where the winner has nearly always claimed the presidency. Trump is now slightly ahead in the Ohio polls. It’s also worth noting that his recent boost has put Trump ahead in five of the 12 most crucial states, and that in two others Clinton has only a marginal lead.

Markets have been pricing gridlock:

Financial assets have been discountin­g a Clinton White House, a Democratic Senate and a Republican House of Representa­tives. Markets would seem to prefer this outcome because a balance of power limits the potential for extreme policies. Less cynically, there is some evidence of bipartisan support for infrastruc­ture spending. Debate about how much to spend and where to spend it could still leave the idea bogged down in Washington, but a well thought-out fiscal stimulus programme could be a driver of stronger growth.

With more uncertaint­y now coming through in the polls, investors have to ask themselves what these candidates’ policies will really look like.

The first debate may make things clearer, but at the moment that’s a challenge: Trump has no track record and his pronouncem­ents have often been vague, and while Clinton clearly has form it’s still difficult to know how seriously to take her statements on issues like drugpricin­g policy.

The weighing machine needs the voting machine:

The great value investor Benjamin Graham once said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” His words resonate during times like these.

Those of us who, like Graham himself, think of markets as weighing machines, guiding prices gradually towards economic fundamenta­ls, acknowledg­e the role the voting machine plays in giving us compelling entry points for longterm investment­s.

We appear due for a re-pricing of risk. Brexit couldn’t provide it. The Fed appears unwilling to. Step forward the American voter.

Joseph V. Amato is President of Neuberger Berman Group LLC and Chief Investment Officer — Equities at Neuberger Berman.

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