Our head of Corporate Credit Research Andrew Sheets provides an
overview of uncertainty around policy following the election of a
Republican administration.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Andrew Sheets, head of
Corporate Credit Research at Morgan Stanley. Today I’m going to
talk about the US election - the implications in the past,
present and future.
It's Friday, November 8th at 2pm in London.
The US Election is over, and the result was relatively clear.
Republicans won control of the Presidency, the Senate, and on
current projections, are likely to narrowly take the House of
Representatives. The so-called ‘sweep’ will provide significant
leeway to enact policy.
There is going to be lots of time over future weeks and months,
and even years, to discuss what all of this is going to mean. But
for now, I want to offer a few thoughts on the impact across the
past, the present and the future.
Looking back, the US election has been a very well-known
uncertainty that has hung over this market all year. The polling
was close between two candidates with very different policy
priorities. To the extent the simply not knowing was holding some
investors back, or that investors were worried about a contested
outcome, or even worse, political unrest – that issue has now
passed. The relief from that passing may help explain some of the
recent positive market reaction.
For the present, we now sit in this curious middle-place where
the uncertainty of the result is behind us, but any uncertainty
from policy changes have not yet arrived. Coupled with still
strong US economic data, another interest rate cut from the
Federal Reserve yesterday, and the tendency of markets to perform
well in November and December, and the path of least resistance
in the near term may be for markets to continue to trade well.
The future, however, may have just become less certain. Credit
likes moderation and stability, and we think the current economic
mix, with US GDP growth and inflation at both around 2.5 per
cent, while the unemployment rate sits near historic lows at 4.2
per cent, has been a good one for credit. It’s been a major
driver of our optimistic spread forecasts this year.
Yet based on exit polls, US voters were not happy with this
economy, and voted for change. The question, which will now
dominate investor conversations, is how much of what the new
administration has said they will do, will end up happening – on
everything from tariffs, to taxes, to immigration.
I can assure you that there’s a very wide investor expectations
around this. The ambiguity isn’t necessarily a problem now, but
we expect these questions to harden as we get into early next
year. And given the likely sweep, the odds for larger changes in
policy, especially much looser fiscal policy, have risen
significantly. Whatever your average expectation for the US
economy over the next 24 months now is, we think the bands around
that have widened, and that’s also true globally, from Latin
America, to Europe, to Asia.
To be a little more specific about these wider bands: To the
downside, there are now scenarios where tariffs and deportations
push up inflation and weaken growth. And to the upside, there are
scenarios where potentially lower taxes and looser regulation
could drive higher stock markets and more corporate animal
spirits.
But for credit, both of these present challenges: tight spreads
are absolutely not priced for stagflation, while animal spirits
and more corporate aggression aren’t necessarily a great story if
you’re a lender. A more benign, middle scenario is, of course,
still possible, and we’re keeping an open mind. But the future
has now become more uncertain.
Thanks for listening. If you enjoy the show, please leave us a
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a friend or colleague today.
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