In recent letters and on our recent client conference call, I have discussed political risk and its prominent place right now in portfolios. In this light, the Trump Administration is foundering and on the defensive on several fronts: Comey firing and subsequent confused official rationales; Russia investigations, Comey's private discussions with Trump and memo thereon; the President's leak of Israeli intelligence to Russian Foreign Minister Lavrov and Ambassador Kislyak; and substantial weakening of President Trump's support system within the Administration, in the Republican Party, in the government, and in the electorate.
The implications of this foundering are that legislative initiatives in taxation; health care; trade; immigration; infrastructure; employment; and economy will likely be effectively sidelined as political matters accelerate and increasingly occupy the entire government. Speculation runs the gamut:
- Hard core Trump supporters (including Trump himself) believe Trump is the victim of a media conspiracy to destabilize his Administration
- Strong right allies (such as Mitch McConnell) believe that the Administration simply needs to make personnel changes to right the ship
- Moderate Republicans (such as John McCain) believe that concerted bi-partisan efforts need to be made to establish facts in the various matters
- Moderate Democrats (such as Mark Warner) believe that concerted bi-partisan efforts need to be made to establish facts in the various matters
- Strong left opponents (such as Nancy Pelosi) believe that impeachment proceedings may need to begin
- Hard core Trump opponents believe that criminal indictments should be and possibly are imminent against a broad array of senior political figures.
Prior to today, markets have exhibited very low volatility in response to political chaos, and appear to be doing their job of focusing on future cash flows from businesses, taxation, and other projects. Our interpretation is that market systems are functioning well and relatively calmly even if political systems are convoluted. Today the mood changed, with markets around the world down approximately 1.5%. Notably, the dollar has weakened by 3% since the beginning of the year, which could suggest some weakening confidence in the United States by the rest of the world. We are also watching the yield curve and credit spreads closely for signs of weakness in the US economy - the yield curve is showing some signs of flattening.
For a number of months we (Todd Centurino and I) have discussed our belief that the investment opportunity set is meaningfully stronger outside the United States based upon valuations alone. With France's recent election of the pro-EU Emmanuel Macron to the Presidency, enhanced stability within the Eurozone is becoming clearer. Global growth, including in emerging markets, has been strengthening. And now, with the growing political problems in the United States, we have a preference for a global market weight (without an overweighting to the US) in equity portfolios. We do not mind holding some additional cash in portfolios right now.
Like many, we are watching events in Washington DC very closely, and will be prepared to report to you as they change. In the meantime, please do not hesitate to contact me if you have any questions or concerns.