The great French philosopher, Voltaire, once said, “Doubt is not a pleasant condition, but certainty is absurd.” I may get that tenet tattooed on my forearm! I was certain that, if Donald Trump won the presidency this past November, the condition of uncertainty would plague risk markets and cause a sharp flight-to-quality rally in treasury notes. I really had no doubt. After all, what exactly would a candidate who ran on the promise of dramatic change in fiscal spending, tax and trade policy, regulation, and international security agreements do if he took office? How would such a bold shift in domestic and global policy affect the markets and the global economy? How would the Federal Reserve respond to a policy of large fiscal spending at a time of near full employment?
Markets hate uncertainty and are prone to run to safety until they can get a clearer view of the immediate future. Perhaps more importantly, business (the actual economy) abhors uncertainty.
Business may hate the policies they must abide by, but at least they know what the rules are and how to follow them. When a high degree of doubt is introduced, planning and investment of capital halts until there is some clarity. Armed with these thoughts, I was certain that the reaction to Trump’s victory would be similar, if not greater, to the initial market reaction to Brexit. Moreover, to the minority of investors who believed Trump would win, their certainty in the flight-to-quality scenario was the same as mine.continue reading »