5 investment-related issues emerging this election cycle
October 4, 2016
Every election season seems to bring out familiar issues that help shape not only the national debate, but state and local races as well. While recurring issues ranging from foreign policy to Social Security have again entered the debate this cycle, a number of economic and investment issues have also emerged, and these have the potential to generally affect both the markets and investors. In looking at five of these topics, there are some broad considerations for investors observing election results in November. Get a brief overview from this listing, and then explore each topic in more detail below.
Key facts about the 5 investment issues
- The national debt: The growing U.S. debt is not only an issue for investors in terms of government budget deficits, but it’s part of the bigger picture of the global debt supercycle.
- Household income: Despite recent positive numbers, household income has been relatively stagnant for nearly a decade, leaving Americans to wonder about the impact on the economy and capital markets.
- Global trade: This issue, which has led to moving a number of U.S. manufacturing jobs offshore and has become a key election topic, is a multifaceted issue that bears further examination by investors.
- Infrastructure: The state of the country’s roads, bridges, and other infrastructure is both a key investment area and a voting issue of growing importance.
- The U.S. Federal Reserve: With increasing scrutiny of the Fed from lawmakers and candidates, all eyes are on the U.S. central bank and how its actions may affect investment outlooks.
The national debt
The national debt is often subject to political discussion, and this election season is no exception. Beyond the debate, however, it has proven difficult to find solutions to the thorny problem of budget deficits and the national debt. These are often rooted in larger economic issues and have grown significantly since the global financial crisis of 2008–2009. As of the end of July, total public U.S. debt stood at more than 105% of the national gross domestic product (GDP), according to the Federal Reserve Bank of St. Louis. By comparison, the national debt was 84.5% of GDP at the end of 2009, while back in 1981 it was only 31% of GDP.
Chart 1. Total public debt in the United States as a percentage of GDP
Source: Federal Reserve Bank of St. Louis
The growing U.S. debt is only a piece of a bigger picture: the debt supercycle, which is the latest in a cyclical build-up of global debt. In the current supercycle, explored in depth in our Great Risk Rebalance series, governments and policy makers have attempted to reflate economies largely through the issuance of more government debt. This global burden of debt — including the U.S. national debt — contributes to headwinds to economic growth, and to larger economic challenges that the U.S. government and policy makers will need to address on a number of fronts, from tax policy to spending and budgeting.
Many Americans have grown increasingly concerned about an economy that, despite improving unemployment data and strong markets, has seemed to struggle with income growth. In the last 15 years, the U.S. has gone through two recessions fueled by bubbles, one in the stock market and the other in housing. The economy recovered and unemployment figures have since become relatively low — currently at 4.9% as of July 2016.
Meanwhile, household income has generally plateaued, especially since the global financial crisis, as seen in Chart 2 below. There have been recent bright spots. The U.S. Census Bureau reported in September 2016 that the 2015 median household income was $56,516, up 5.2% from the previous year — although it’s still below the 1999 peak of $57,909. Also, the wage growth rate reported by the U.S. Bureau of Labor Statistics in July was 4.06%, one of the highest monthly growth rates seen in 2016.
Chart 2. U.S. median household income vs. GDP growth, 1993–2014
Source: Federal Reserve Bank of St. Louis
Notes: "Real" indicates adjustment for inflation. For comparison purposes, both measures, real GDP and real median household income, have been set to 100 starting at year 1993.
Despite these recent gains, household income and wage growth have generally seemed elusive to many Americans since the global financial crisis. Because household income is a key factor in the amount of disposable assets that Americans can save and invest, it can also contribute to the outlook for the overall economy and the capital markets. Investors may wonder about the widening gap between household income and GDP growth (also Chart 2), and whether a different administration and U.S. Congress could help improve the picture.
Chart 3. U.S. wage growth over 12 months, August 2015 – July 2016
Source: U.S. Bureau of Economic Analysis
Related to the discussion about income and employment here in the U.S. is the issue of global trade — a multifaceted issue that can affect the economy from jobs to the financial health of companies to the strength of a country’s currency.
In this election season, there has been a particular focus on U.S. jobs that have been moved to other countries over recent years, with trade deficits pointed to as the cause for these job losses. However, trade deficits and the roles they play in global commerce are complex issues and possibly among the least understood by the general electorate. An understanding of the basics and how trade can affect the economy at large could help investors put the issue in some perspective.
When a country runs a trade deficit, it imports more goods and services than it sells abroad. In the U.S., a long-standing deficit means that trading partners around the world are sending us more goods and services than we are sending them. Often, this yields economic benefits. For instance, a trade deficit allows us to receive certain goods at better prices than could be achieved by manufacturers here at home, resulting in a boost to the overall standard of living.
However, this arrangement can also have trade-offs; one of the primary costs of open international trade is that manufacturers can shift some of their production overseas where production costs — primarily those related to labor — are often lower than they are in the U.S. Since the early 2000s, and particularly in the manufacturing sector, there have been jobs previously based in the U.S. that have been moved offshore.
Although many believe a widening trade deficit is unavoidably bad, it’s not necessarily a zero-sum game. In other words, the goods or services traded with a specific trading partner don’t have to balance out monetarily — in fact, there are many factors involved that make it difficult to say a trade deficit is inherently good or bad. For example, a rising trade deficit is not, by itself, evidence of economic weakness as seen in 2000, when the U.S. economy managed to achieve 4% unemployment despite running a trade deficit that was larger than it is today.
Chart 4. Change in manufacturing jobs over time
Source: U.S. Bureau of Labor Statistics
Those who want to eliminate, or at least reduce, trade deficits often argue to raise tariffs, with the idea that they will push jobs back to the U.S. However, there is a strong likelihood that most jobs performed overseas will not automatically transfer back to the U.S. Also, tariffs can sometimes do nothing more than drive up the prices that U.S. consumers must pay at home (see “one-minute case study” below).
The costs and benefits of tariffs: A one-minute case study
Between 2004 and 2008, annual imports of tires from China increased by more than 100%, climbing from 15 million to 48 million. In 2009, the U.S. imposed a 35% tariff, to be effective for three years. A look at the benefits and drawbacks:
Ostensibly, the tariffs saved at least one thousand jobs at U.S. tire manufacturers.
However, the measure led to price hikes that amounted to $1.1 billion over the three-year period, siphoning money away from other areas of the economy.
Source: The New York Times, March 2016
The state of the nation’s roads and bridges — its infrastructure — is a topic that doesn’t always enter into the election lexicon but has been brought up more and more. It’s also an issue on which all parties tend to agree: U.S. infrastructure is not in good shape. For example, the American Society of Civil Engineers gives the country’s roads, bridges, ports, and tunnels a D-plus grade, and has estimated that more than $3 trillion would be needed to bring them up to code.
The nation’s infrastructure can also be defined as much wider than simply roadways, and can include everything from airports and rail systems, to power grids and water supplies, each of which can be viewed as warranting some form of modernization or security enhancement.
Each type of infrastructure comes with much debate about how to accomplish needed improvements and how to fund them. With many investors increasingly seeking out alternative investment opportunities, or areas of potential growth within the economy, the future effects of policy decisions related to U.S. infrastructure spending will certainly bear watching.
In the U.S., this topic can carry over to state and local elections as well, in cases where municipal bond issues to fund infrastructure projects are on ballots. (For more about municipal bond ballot initiatives and the potential tax impact they can have, see The election may mean revisiting your portfolio’s tax advantages.The election may mean revisiting your portfolio’s tax advantages.)
The Federal Reserve
The Federal Reserve is generally seen as independent and staying clear of politics. Since the global financial crisis, however, there has been a great deal of focus on the Fed as it carved out a path for U.S. monetary policy that has included seven years of near-zero interest rates, while attempting to adhere to financial reform regulations from the 2010 Dodd-Frank Act.
Even prior to the global financial crisis, an era of increased communication from the Fed was ushered in by former Fed Chairman Ben Bernanke, which arguably served to heighten public attention on the Fed and monetary policy. Meanwhile, the Fed has drawn criticism at times from both sides of the aisle in recent years, specifically for actions during and after the crisis, such as its role in rescuing financial institutions and a massive bond-buying program that was part of quantitative easing efforts.
There have been calls among lawmakers for such changes as more oversight or an audit of the Fed, as well as contradictory pushes for both stricter financial reform and for a repeal of the Dodd-Frank Act.
In the context of further financial reform, there has even been discussion this election cycle about the possibility of reviving the Glass-Steagall Act. Originally passed as part of Depression-era banking legislation in 1933, Glass-Steagall enforced a distinction between investment banks and commercial banks so that they could not commingle their businesses. It was repealed in 1999, and since then policy makers and economists have argued whether a continued separation might have prevented serious issues like the global financial crisis.
Today, central banks around the world are using monetary policy and other tools in a way that places them front and center, as primary drivers of global markets. As the central bank for the world’s largest economy, the Fed is at the forefront of that trend. Any changes that may be in store — either in Fed policies, or with regard to government influence or oversight of U.S. central banking — are likely to affect investment outlooks.
The views expressed represent the Manager's assessment of the market environment as of September 2016, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.
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