Tag: Trump

Bi-Weekly Geopolitical Report – Growing Fragility in the US Bloc (April 7, 2025)

Posted on by Amanda Ahne

by Patrick Fearon-Hernandez, CFA  | PDF

We at Confluence have written extensively on the end of post-Cold War globalization and the fracturing of the world into various geopolitical and economic blocs. We’ve noted that the large, rich bloc led by the United States is an attractive place for investors, but fractured supply chains and rising international tensions may produce a range of economic and financial market problems, from elevated consumer price inflation to higher and more volatile interest rates. In this report, we explore what could happen to the US bloc as President Trump pursues his aggressive policies to push the costs of Western security and prosperity onto the US’s traditional allies. As we’ve noted before, those policies run the risk of reducing US influence with its allies and undermining cohesion within the US bloc. We assess in this report that reduced cohesion probably won’t splinter the US bloc in the near term. Nevertheless, we begin laying out how the world could change if the US bloc does disintegrate, and we discuss the economic and market implications if it does.

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Don’t miss our accompanying podcasts, available on our website and most podcast platforms: Apple | Spotify 

Asset Allocation Bi-Weekly – Managing an Economic Slowdown (March 31, 2025)

Posted on by Amanda Ahne

by Thomas Wash | PDF

Six months into his presidency, Reagan backed restrictive monetary policy to combat inflation. While the move initially drew criticism for its short-term economic pain, many viewed it as a necessary step toward long-term stability and growth. This optimism was ultimately vindicated, paving the way for Reagan’s landslide reelection in 1984. The lesson: an early-term recession, though difficult, can create strategic opportunities to push a bold and transformative agenda forward.

A president typically wields the greatest amount of political capital at the outset of their tenure. This period, often referred to as the “honeymoon phase,” is usually marked by peak public approval, fueled by the optimism and goodwill that was generated during the election campaign (see chart below). Supporters are often energized, and even those who may not have voted for the president often extend a measure of deference and give the new administration an opportunity to set the tone and pursue its agenda.

During this pivotal period, President Trump has escalated his aggressive trade war with the rest of the world. It appears that the administration’s strategy is to weather any associated short-term economic challenges — such as heightened market volatility caused by unpredictable trade policies and budget cuts designed to strengthen the government’s fiscal position — in order to achieve a broader goal of transforming the US economy from one driven by high consumption to one that prioritizes export promotion.

The administration’s ability to manage an economic downturn will be largely influenced by the capacity to lower long-term rates, especially in today’s high interest rate environment, as well as the fiscal flexibility created by recent efforts to curb government spending. Extending the 2017 corporate tax cuts could also provide businesses with a financial buffer, enabling them to adapt to the impact of new tariffs.

Importantly, the Trump administration is apparently counting on the Federal Reserve to serve as an economic safety net in the event of a severe downturn. While the central bank has already reduced rates by 100 basis points from their peak during the tightening cycle, it still has the ability to cut rates and restart balance sheet expansion, if needed. These measures could enable households to refinance their mortgages at lower rates, thereby improving household balance sheets and paving the way for higher spending.

That said, this strategy carries significant risks. For example, if the downturn persists for too long, it could potentially trigger a financial crisis, undermining household confidence and consumers’ willingness to spend. In such a scenario, the government might be forced to take more drastic measures, such as implementing a bailout or fiscal stimulus to restore confidence and stabilize the economy. Such spending could lead to a sharp increase in government debt, raising concerns about its long-term sustainability and potentially leading to a period of stagnating growth.

While there is no reward without risk, the president’s ability to slow the economy to implement longer-term, sustainable reforms also hinges on his capacity to embrace short-term political pain in exchange for long-term gain. For example, we note that while the Reagan recession was relatively short, it resulted in Republicans losing House seats to the Democrats. This scenario could present considerable challenges for the Trump administration. Unlike President Reagan, who successfully advanced his agenda by working across the aisle, Trump may find himself constrained by a lack of bipartisan cooperation given the current political climate. As a result, he may be more incentivized to ensure that Republicans regain and possibly add to their majority in Congress, something Reagan was not able to do in the mid-term elections during his first term.

In such a scenario, the president would need to pivot strategically, prioritizing the delivery of a tangible and widely recognized victory to the public ahead of next year’s primary election to sustain momentum and galvanize support. This could take the form of highlighting major achievements, such as breakthroughs in trade negotiations or the successful passage of the long-awaited tax bill.

We continue to believe that equities will be able to produce attractive long-term investment returns, especially if the Trump administration achieves its long-term goals. However, given the current level of uncertainty and the risk of near-term economic disruptions, we also see gold as an attractive option. Additionally, the potential for a decline in long-term interest rates could make this an opportune time to extend duration in government fixed-income securities.

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Bi-Weekly Geopolitical Report – Trump and the Political Economy of Alliances (January 27, 2025)

Posted on by Amanda Ahne

by Patrick Fearon-Hernandez, CFA  | PDF

Now that President Trump is back in office, we think investors are about to see major changes in how the United States deals with the rest of the world. Trump, Treasury Secretary Bessent, and other key officials have signaled they will push to dramatically shift US policies on national security, foreign affairs, and international trade and capital flows. They haven’t necessarily laid out specific, detailed plans. However, based on their initial statements, it’s clear that they aim to reverse the traditional US approach to global hegemony and force US allies to shoulder more of the cost of allied security and prosperity.

In other words, Trump and his aides want to revamp the “political economy of alliance,” not only in formal military alliances such as the North Atlantic Treaty Organization (NATO), but also in the broader US-led geopolitical and economic bloc. At the same time, the China-led bloc is changing its internal relations. In this report, we show how the Trump/Bessent plan could cut costs for the US but at the risk of reducing its influence or hurting the cohesion of the US bloc. At the same time, the China bloc is moving toward greater cohesion and increased power. We wrap up with the implications for investors.

Read the full report

Don’t miss our accompanying podcasts, available on our website and most podcast platforms: Apple | Spotify 

Asset Allocation Weekly (October 2, 2020)

Posted on by Rebekah Stovall

by Asset Allocation Committee | PDF

The death of Ruth Bader Ginsburg was yet another political shock for 2020 in a year rife with unusual events.  The year began with the first official case of COVID-19 in Washington State on January 20.  The pandemic and subsequent measures to contain the virus have led to unprecedented levels of economic volatility.   President Trump was acquitted of impeachment on February 5.  Relations with China have deteriorated.

As we head into the election, investors’ fears are high.  For example, retail money market funds (RMMK) remain elevated, though off their earlier peaks.

Our political cycle monitor suggests that a Biden win could result in a decline in equities into October.

Barring an unexpected landslide, it is quite possible that this election could be disputed.  The last time this occurred, in 2000, the election wasn’t decided until December 12, when the Supreme Court effectively ended the recount.  George Bush won a narrow victory in Florida and in the Electoral College (271/266).  The financial markets were affected by the outcome; in the period from the election on November 7 until the Supreme Court decision, the S&P 500 range from high (made on November 8) to low (made on December 1) was 9.9%.  A decline of this magnitude would probably not be enough to warrant substantial portfolio adjustments.

Voter attitudes were not nearly as hardened then as they are now.  A Pew survey suggested that 45% of voters thought that the winner really mattered, while 49% believed “things would remain about the same.”  Currently, 83% of voters think it really matters who wins and only 16% believe that “things would remain about the same.”  The Pew survey suggests that this election is being viewed as zero-sum; losing is perceived as devastating, so both sides are primed to contest a close election.

Although equity markets have performed quite well from their March lows, the recent weakness does appear to be starting the process of discounting a Biden victory.  Although we would not necessarily expect a decline to the 90% level implied on the above chart,[1] a period of weakness in the next few weeks is likely.

Is there a precedent for the current election?  The best analog is the 1876 election, which was won by Rutherford B. Hayes in the electoral college by a single vote, 185-184 over Samuel J. Tilden.  And, that result only occurred weeks after the November ballot.  Hayes was given the presidency in return for ending Reconstruction.  An analysis of this election will be the subject of an upcoming WGR, but the following chart offers some idea of the impact of an uncertain election outcome when it is perceived as zero-sum.

From March 1876 to March 1877 (when Hayes was inaugurated), the index, on a monthly average basis, fell 29.7%.  Although the recovery from the lows was robust, the March 1876 level was not exceeded until October 1879.  As we will discuss in the upcoming WGR, the 1876 election occurred during the long depression that began with the Panic of 1873, which was considered the worst economic downturn until the Great Depression.  Thus, the disputed election cannot be blamed for the entire decline, but it likely contributed.  Increased tensions in the November election is a factor the Asset Allocation Committee will grapple with in the upcoming portfolio rebalance.

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[1] To quote Ned Davis, a famous market analyst, cycle analysis shown above should be used more for direction and less for level.