April 2017 Market Update
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- Category: Latest News
I’ve had some criticism recently for the political content of my “market reviews.” This criticism is not without merit. RPBG is a non-partisan organization of property owners and service providers. We try hard to avoid taking political positions, and we steer clear of any political endorsements or preferences for one candidate or another.
Certainly, we have taken strong political positions on issues that directly impact our members. There have been no shortage of new ordinances, laws and mandates coming out of City Council or Springfield in recent years. We are not shy about taking positions on these pieces of legislation when we believe our members are being adversely impacted or singled out.
But things have gotten a bit more complicated since the November elections. It has been challenging to separate national politics from business in recent months due to the clear influence the one is having on the other. The (until recently) soaring stock market is one obvious example. Given the heightened mixing of politics and business, is it fair game to raise these issues, or are they best avoided in the interest of remaining politically neutral? I have chosen to take a “grab the bull by the horns” strategy in my monthly reviews. Since the elections, it’s been hard to separate what’s going on in Washington with what’s happening on Wall Street or Main Street.
This past week is no exception. Actions in Washington are, once again, spilling into the business domain. Unless you’ve been living under a rock, you will know that the Republicans tried and failed to pass the American Health Care Act (AHCA). So, what is the link between the AHCA and the markets? For months, we have been witnessing an amazing rise in equities markets worldwide. This has been dubbed “the Trump effect,” a reflection of the optimism the markets have shown for the stated goals of the new president to cut regulations and reform the tax code.
But something strange happened on the way to our new era of prosperity. Market hopes for tax reform and deregulation have been met instead with threats to cut off funding to Sanctuary cities, raids on immigrant communities and a proposed budget that favors military spending over social programs and the environment. These measures can be argued on their own merit. But the slide in stock prices suggests that investors view these actions less favorably than they would a serious effort to tackle the tax code or the regulatory environment.
The AHCA experience also reveals deep divisions in the Republican Party and the inexperience of the new president in the ways of Washington. This throws into doubt the big plans President Trump and the Republicans have set for themselves, and is increasingly of concern to the markets. The direct result of this newfound uncertainty is a reversal in the gains we have seen in recent months in equities markets. So far, this reversal is small – the Dow Jones remains well above 20,000. But the markets are clearly taking note of what’s happening in Washington, and are not sure they like what they see.
The next big test in Washington, and one that will have a huge impact on the future of our economy, is the looming government shut-down if Congress does not authorize an increase in the current debt ceiling. Without such authorization, the US government will be unable to pay its obligations, causing a default on the national debt. The clock is already ticking, as the current debt ceiling was reached last month (March 15).
In some ways, this is nothing new. Several times during the Obama presidency, we were faced with Congressional opposition to raising the debt ceiling. If anything, one would think that Republican control of both the Executive and Legislative branches of the government would prevent a shut-down from happening.
But the same fissures that emerged in the AHCA debate could come back again over the debt ceiling. The “Freedom Caucus” (the faction of the Republican Party that effectively killed the AHCA) is, and has always been, against any increase in the national debt. At the very least, some of the Freedom Caucus members would like to make defunding of Planned Parenthood a pre-condition of approval for an increase in the higher debt. Clearly, this demand will not sit well with the Democrats, or even some moderate Republicans. It will also, once again, put the much-vaunted negotiating skills of the new president to the test. A default on the national debt is no laughing matter. If it happens, the economy is in for a very rocky ride indeed.
