In the October issue of our monthly flagship publication, we feature:

  • On the Record by Chief Investment Officer Tony Roth, presents the firm’s outlook and explains the top political tensions that could impact markets and tip the scale toward a recession and what would signal the need to reduce the neutral equities weighting in portfolios.
  • In Focus by Senior Investment Strategist Meghan Shue tackles the complex relationship between stocks and interest rates and what it could be saying about the value of stocks today.

Given recent developments in Washington, which come on the heels of an already-tumultuous geopolitical backdrop, this month would seem an apt time to address a series of questions, at least one of which I get in every client meeting these days: How do you and your team incorporate political risk into the investment process? Is there a certain point when politics shifts from being investment noise to carrying more significance for the markets? And what are you doing in portfolios in light of the continuous escalation of geopolitical risk around the globe?

Let’s start with a fundamental observation that not all managers necessarily recognize, much less admit. When it comes to politics and investing, conventional thinking is wrong at least as often as it is right. And empirically speaking, investors are no better than anyone else at predicting political outcomes. What’s more, they can be surprisingly obtuse in seeing the impact of those political results on markets. Consider a recent example. As a group, not only were investors no more prescient than any other population in marking Trump’s 2016 victory, but the few who did then generally forecasted market retrenchment. In the three years since Trump was elected, stocks and bonds have made historic gains. Perhaps these failures are explained by personal bias, perhaps not. What matters for us is simply to recognize the inherent difficulty in the challenge and the need to assume it with appropriate realism as to our likelihood of success.

Having set realistic limits on the value of the exercise, let’s jump in. Today’s outlook is punctuated by four key political tensions, the outcomes of which are likely to define the short-to-intermediate course for markets. These are, of course, in addition to the many other geopolitical goings-on—from Brexit to Iran—that might but need not spill more broadly into financial markets.

Please see important disclosures at the end of the article.

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