The latest media/market pundit parlor game is to try and figure out what period in economic and market history best compares to the current environment. Is it the Depression 30’s? Or The Stagflation ’70’s?
No, I don’t think either, I prefer to be more specific and look at 1994. The year, similar to this year, was filled with an abundance of political policy, uncertainty and risk. In fact, so far the year to date volatile performance of the S&P 500 has echoed that of the S&P for the same period in 1994…after seesawing back and forth in the first half of both years….the broad market closed basically flat. Activist policy agendas and rising political risk played a major role so far this year, as it did in 1994, creating both increased volatility and investor uncertainty….hence the erratic rally round the flat line trading action in both years.
Recall the events of 1994. Forrest Gump won the Academy Award for Best Picture (I was rooting for Dumb and Dumber…more on that later). Bands like Weezer, Oasis and The Beastie Boys dominated the airwaves. Netscape introduced Navigator, the first web browser. The Euro was still a figment of some misguided economist’s imagination and the Chinese multi trillion dollar surpluses were merely a Peking policy maker’s wet dream.
Also recall the political uncertainty of the ’94 period. Newly minted President, activist and agent of “Change” Bill Clinton and his wife had attempted but failed to launch the unpopular and economically invasive healthcare reform bill which impacted one fifth of the US economy. The heated debate surrounding this activist policy was divisive and polarised the country which let to a significant drop in the polls for Mr. Clinton…sound familiar? To his credit he did pass NAFTA early that year but that idea was hatched by his predecessors. Enter the Congressman from Georgia….Newt Gingrich and his “Contract with America” and the November mid term elections….the rest is history. It was a rout of the Democrats.
After 40 years in the wilderness the GOP took back both the House and Senate. Suddenly, with the bipartisan “support” of the GOP led Congress, the politically pragmatic Mr. Clinton, still weak in the polls, saw the free market light and pivoted his failed activist ideology toward more market based economic friendly policies of balanced budgets and targeted pro growth fiscal policy….This included important tax cuts for business…like capital gains. He morphed from a “Dumb” market unfriendly bigger government liberal strategy to a “less Dumb” free market centrist agenda. And we all know what happened after that. After being up only 1% in 1994….stocks rose 36% the following year. The investor class was happy with the Presidents pivot and rewarded him with a decisive re-election.
Now here we are in 2010….mid term elections are five months away…and again we have a new untested activist President who, with the support of a highly partisan Democrat Congress, has had some legislative success with 2000+ pages of Healthcare reform, Financial Re-regulation and Trillion dollar stimulus/spending packages…and from the standpoint of the markets and the economy all I can say is…compared to the “Dumb” policies of the pre pivot early Clinton years….these deficit inducing/ debt creating and government spending run wild policies have wreaked havoc on investor sentiment and aren’t just “Dumb”…they are “Dumber” then Mr. Clinton’s. As evidenced real time by the President’s and Congress’s low approval ratings and increased market volatility…the folks and investor class agree with this “Dumber” assessment. They have even helped give rise to a number of forecasts calling for a double dip recession.
I am not making any of this up….these are the facts. History shows that President Clinton dropped his failed activist approach for bigger government after the 1994 mid terms and, aided by the new GOP majority took a bipartisan approach and adopted more market friendly pro growth policies …It remains to be seen whether Mr. Obama feels it is necessary for him to pivot after this years mid term elections…even if the GOP is successful and retakes Congress…he is a gifted politician but is he a pragmatic one? Or is he too caught up in his big government is better ideology.
Either way, we are at a difficult economic cross road…and political gridlock will be counterproductive at a time when decisive leadership and policy clarity are needed. This week there has been commentary on Bloomberg and on other financial blog sites suggesting that the GOP shouldn’t get too cocky and think that they are a shoe in come November….leadership is clearly an issue there and Republicans have to educate us on what they are for…not just what they are against. That remains to be seen.
At this point in the year, I am not optimistic that we will see a repeat of the excellent performance of the S&P 500 in 2011 that we witnessed in 1995 following “the pivot”. The economically invasive big government legislation that has been passed is hugely expensive and all have a built in time release mechanism that only adds to their uncertain impact on the economy in the years to come. I am also cautious because the Republican leadership so far does not have the bravery or foresight to come up with viable policy alternatives as their predecessors did in 1994.
So…the bottom line? Political policy risk continues to run high…sure the GOP may retake the House on an anti “kick the bums out” ticket…but that won’t help the economy if they don’t have specific pro-growth policy alternatives…we would be left with going from Dumb…to Dumber…to Dumbest! As for global asset mix strategy? We have a 12 to 18 month time horizon. We continue to overweight bonds and cash at the expense of equities and other risk assets. We have de-risked by selling Asia and continue to underweight the Euro zone….EM’s are also underweight…we remain quite defensive.
This is a guest post from the Peter Stock of Stock Investment Management Inc in Manchester, VT.