Washington Reality Impacts Investment Focus

Political Warfare and U.S. Economic Growth

For many developing countries, investors will haircut their market capitalizations to reflect their political instability. While the U.S. market will not likely see such a haircut, it would not be surprising to see the U.S. economy ultimately hurt by political warfare in Washington. This may prove to be the case if Congress shows little progress on the fiscal measures that excited equity markets after the presidential election.

Monetary Shotgun vs Fiscal Rifle Shot

After nearly a decade, unconventional monetary policy seems fully exploited. As important, the shotgun approach of monetary policy primarily worked its positive effect on financial asset prices. Therefore, the real economy needs a greater, more directed expansionary stimulus. Unlike monetary policy, fiscal policy can provide more of the needed rifle shot stimulus to targeted sectors in the real economy

D.C. Small Town Politics Effects the Big Country Economy

Having been involved in the “dirty” battles of local town politics for nearly a decade, observing the antics in D.C. seems similar to those of my small town. Fortunately, the nasty small town politics only affected our New Jersey town of 5,000. If what appears to be the equivalent of small town politics only effected the nation’s capital, the rest of the country could stand back and enjoy the D.C. reality program. Unfortunately, the rest of the country must suffer from the standstill caused by the equivalent of a small town political battle but in our nation’s capital.

Last week’s goings on in Washington with the defeat of healthcare reform certainly brings little comfort for those looking for rapid action on new fiscal measures. Next year’s Congressional elections will likely bring any possible new fiscal actions to a halt very early in 2018.

Adding to that traffic jam, in the next two months, congress will need to divert its attention to debating both a new FY 2018 federal budget and raising debt ceiling limits. Perhaps, from the lessons learned over the last few months, Congressional leadership might seek a different path for considering both tax reform and infrastructure spending bills. Shockingly, this would require a bi-partisan approach. Admittedly, I am sure most would give this possibility low odds. Those low odds would also apply to speedy approval of those bills without a change in approach.

Live by the Sword Die by the Sword

The change in the cast of characters last week at the White House adds to these congressional uncertainties. Moreover, just as I am writing this commentary, “The Mooch” fell victim to General John Kelly’s sword. The General brings a strong military leadership record combined with successful civilian leadership of the Department of Homeland Security. For investors, will the new chief of staff bring greater White House focus to enacting proposed fiscal stimulus bills? Washington insiders doubt this change will bring that focus but they also doubted the election of our current President.

Look Outside the States

When compared to the U.S., economies outside the states seem to be stepping up their growth. The I.M.F’s most recent world economic outlook looks for global growth to reach 3.5% this year and 3.8% in 2018. The I.M.F. revised downward its estimate for U.S. economic growth to 2.1% for this year and next. These downward revisions reflects its view that U.S. fiscal policies will be less expansionary than previously expected. At the same time, offsetting the lowered U.S outlook, the I.M.F. revised upward its economic forecasts for Japan, the Euro Area, as well as China.

Investment Conclusions

With the favorable global economic outlook, we would expect investors to shift more of their equity investments to non-U.S. equities. A conservative approach would take advantage of faster global growth forecasts by investing in U.S. global corporations. In addition, their revenues and earnings also benefit from the recent weakness in the U.S. dollar. For the more ambitious, we would look to actively managed funds in non-U.S. companies. In our view, this places your funds in the hands of those portfolio managers most familiar with the nuances of investing throughout the globe. This includes adjusting for the inevitable ebbs and flows of currency changes.