The Effect of Recent US Political Events on Investments

The US has recently experienced a number of political events that have had immediate repercussions in the investment sector. Many analysts, however, believe that the markets’ responses are short term and that there will be little impact on the financial world in the long run.

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On the 8th of August President Donald Trump issued a warning to the leader of North Korea, Kim Jong-un, stating that he would unleash “fire and fury” in response to any military provocation from the East Asian country. The warning came shortly after North Korea announced they had successfully created a miniature nuclear warhead small enough to fit inside the top of their missiles. Following the confrontation the Dow Jones Industrial Average experienced its largest one-week drop since March, falling by 1%, or 234.49 points, to 21,858.32. Other indexes followed suit, with the Nasdaq Composite reaching 6256.56, down by 1.5%, and the Standard & Poor’s 500 index dropping 1.4% to 2441.32. Despite this downward trend many experts, such as chief economist and strategist at Gluskin Sheff, David Rosenberg, believe that this is a short-term change and that the damage that this geopolitical conflict has caused is unlikely to last.

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The Dow Jones Industrial Average, after having regained some ground, was again hit following the president’s response to the recent events at Charlottesville on the 12th of August. In the wake, the index dropped to 21,674.51, a fall of 0.8%. The Standard & Poor’s 500 index saw a further decline of 0.6% to 2425.55 and, for the fourth week running, the Nasdaq Composite was down, sliding 0.6% to 6216.53 in its longest weekly losing streak since May 2016. While President Trump’s controversial statement lend, in part, to these declines, other world political events may have had impacts on the economy too. Terror attacks in Spain as well as controversial minutes from both the European Central Bank and the Federal Reserve contributed to a period of investment uncertainty. Rafiki Capital Management’s Head of Research and Strategy, Steven Englander, believes that these dips will, again, be equally short-lived as the political situation re-stabilizes.

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Without the threat of an acute political or economic crisis, investment markets should return to previously good performance levels, boosting the country’s economic growth. Indeed the Atlanta Fed’s GDP Now predicts that the US’s GDP will increase by 3.8% in the third-quarter of 2017, with the current drops in market activity being the result of short term anxiety amongst investors.

Post-Election Economic Activity

The results of the UK general election on June 8th have left many factors in a state of uncertainty in Britain. The country has been left with a hung parliament, with the Conservatives only securing 318 seats of the 326 they needed to win a majority. This political result has had effects, both positive and negative, on areas of the economy and investment markets.

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Previous trends have shown that, when there is anticipated disturbance in the political sector, investments in commodities such as gold increase as people try to hedge their bets against economic losses. In the run up to the election, there was increase of 64% in people investing in gold for the first time, while numbers of financial professionals buying physical gold were up 49% in the week leading up to the vote.

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Following the announcement of a narrow Conservative win the sterling experienced a sudden drop of 2% in value against the dollar to $1.2683, its lowest level in two months though it regained a little ground back up to $1.27 on Friday the 9th. It is predicted that sterling will continue to experience some level of volatility in the short term.

While the election results have hit some areas of the economy negatively, others are thriving after the news. The FTSE 100 ended on the 8th of June up 1%, while the Stoxx Europe 600 experienced an increase of 0.3%. Global businesses, such as Diageo, Reckitt Benkiser, and Unilever also observed upward movement, all trading at around 1.5% higher by the 9th. Increased value of shares of exporting companies, which make up three quarters of the FTSE 100, are expected to do better as the weakened currency is likely to rise income earned abroad.

The narrowness of the Conservative win will have an impact on how the upcoming Brexit negotiations are carried out as well. Theresa May gambled the Conservative status as the ruling party in the hope of gaining an even stronger position in the negotiations however, this has backfired with no party having an overall majority in the UK parliament. The weakened Conservative position means that a more lenient Brexit deal may be agreed on as opposed to the “hard” Brexit that May hoped for, with no trade deal.

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As the Conservative party enters into discussions with the Democratic Unionist Party (DUP) about a possible coalition, economic uncertainty may continue. This coalition would see the DUP adding their 10 parliamentary seats to the Conservative seats, giving the party the majority it needs to pass legislation, and gain a stronger hold over the Brexit negotiations.