A divisive and contentious election cycle can dishearten voters, and this has been one for the record books.
Yet, there is a silver lining for investors: Not only does the November 8th election end the political drama, or at least quell
it, markets may go up after the dust settles if history is any guide. Indeed, as the chart shows, stock and bond markets have
generally done well – regardless of who takes office – in the few months and the year following Election Day (assuming no
large exogenous event).
There are several possible reasons for this: A reduction in uncertainty surrounding the election outcome, a
subsequent uptick in consumer confidence, and more clarity around fiscal and other economic policies. In this election cycle,
while the two presidential candidates’ agendas have varied significantly, both have indicated they would support expansionary
fiscal policies, such as increased spending on infrastructure and reform of the corporate tax code.
At PIMCO, we see politics as one of the three P’s for investors to watch through at least 2017, along with policy and
productivity, both in the U.S. and globally. As colleagues Joachim Fels and Andrew Balls discussed in their essay
“ What Lies Beneath,” politics is the main non-economic wild card over the next year or more. Indeed, while we are seeing
diminishing returns from monetary policy, a more certain political environment coupled with potentially more expansionary
fiscal policies would be a welcome development for markets.
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