THE POLITICAL CYCLE AND MARKETS: DOES THE RISING TIDE OF “POPULISM” MATTER?
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While it is rare to have an explicit evaluation of politics in the Capital Markets Forecast, 2016 was rife with global political surprises. These
cycles have become microcosms of a much larger global theme: politics are now increasingly a place for the “have nots” to wage war on the “haves,” rather than a battleground for those aligned with the more traditional liberal vs. conservative party lines. For domestic markets, a Trump victory has, so far, propelled equities to new highs amid the prospect of increased spending, reduced taxes, and pared regulation. The ideas that fiscal deficits may soon begin to expand and that central banks are nearing the limits of their effectiveness have provided a tailwind to rising interest rates as well. However, much of “Trumponomics” has so far been devoid of transparent, substantive recommendations, and the resultant policy mix remains vague. Subsequent market reactions will depend on the extent to which a Republican sweep of Congress affords Mr. Trump a carte blanche agenda. This will not become readily apparent until policies are proposed in the months following his inauguration. The political debate occurring in the United States is similar to debates occurring elsewhere in the developed world, especially in Europe. Many are asking whether and how this rising tide of “populism” matters. To address these questions, it is helpful first to understand what is driving voter angst.
Causes of voter angst Unquestionably, developed economies across the Western world have experienced a severe drop in productivity growth since the global financial crisis. From the end of World War II through 1973, labor productivity (as expressed by output per hour of work) grew at an annual rate of 3.3%, and per capita GDP growth nearly doubled. After a dearth of real income growth from 1974-1995 and a resurgence of growth from 1996-2004, we have experienced labor productivity growth at a paltry rate of 1.3% per year. Within economic policy circles, the causes of this retrenchment are debatable; some believe that output
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