U.S. Bancorp announced that it has completed the acquisition of MUFG Union Bank’s core regional banking franchise from Mitsubishi UFJ Financial Group, Inc.
The transaction brings together two premier organizations to serve customers and communities across California, Washington, and Oregon and support a dedicated workforce across the West Coast. Customers will benefit from an expanded branch network, greater access to digital banking tools, and increased choice, the memo said.
“The acquisition of MUFG Union Bank underscores U.S. Bank’s commitment to creating economic opportunities for our customers and communities across the West Coast,” said Andy Cecere, chairman, president and chief executive officer of U.S. Bancorp. “The closing of this acquisition brings together two premier organizations and their teams who are focused on putting customers first.”
U.S. Bank will provide MUFG Union Bank customers with information regarding the conversion of their accounts in the coming weeks. Until conversion of MUFG Union Bank systems and accounts, customers will continue to be served by their respective branches, website and mobile apps. Systems integration and account conversion is expected to occur in the first half of 2023.
Additionally, once customer conversion has occurred, implementation of U.S. Bank’s five-year, $100 billion community benefits plan will begin.
Investors looking for good news have found some, however, while this may be the beginning of the end of the bear market in U.S. equities, don’t mistake it for the real end, says Lisa Shalett, Wealth Management Chief Investment Officer at Morgan Stanley.
On the good news side, the latest consumer price index report suggested that inflation may have peaked in October, and the Federal Reserve may now be more likely to slow the pace of interest rate hikes. Other reasons for optimism included investor sentiment, as measured by the American Association of Individual Investors, which stood at its highest levels since December 2021, says Shalett .
However, in a Bear Market investors still need to allow this prolonged market downturn to fully play out and make a realistic assessment of the economic slowdown and recession risks.
Historically, when investors’ primary concern shifts from politics and inflation to the health of the economy, the outlook for stocks and bonds tends to diverge. That’s why investors may be relatively well served by favoring bonds over stocks in 2023.
Bond yields have meaningfully increased, providing investors an opportunity to earn decent income. We expect inflation to be around 3.5% by the end of 2023, and U.S. Treasuries, through the 10-year maturity, are yielding more than that. That means their inflation-adjusted, or “real,” yield could turn positive. Meanwhile, municipal and corporate bonds are providing an extra 1.5 to 2.5 percentage points beyond Treasury yields. Here’s the evidence:
Bonds are also relatively fairly priced. Tightening cycles, in which the Fed raises rates to bring down inflation, generally do not end before the Fed funds rate is durably above core inflation, suggesting that bond prices have fully adjusted. Once this adjustment is complete, bonds may be viewed as fairly priced. Currently, the futures market for the Fed funds rate is predicting a peak of about 5%, to be reached in April or May. This appropriately coincides with where core inflation is likely to be.
Bonds may offer attractive capital gains. Investors who are wary about the economy will likely gravitate toward Treasuries, which would push yields lower and prices higher, meaning it’s possible to enjoy relatively high coupon payments now and potentially sell at a premium later.
In contrast, U.S. large-cap stocks, as measured by the S&P 500 Index, do not look as attractive:
They are still too expensive. At current prices and consensus earnings estimates, the S&P 500 Index is selling at a forward price-earnings (P/E) ratio of 17. This is not compatible with where rates and inflation are likely to be next year—risk-free long-term rates around 3.5% and inflation above 3%—alongside lackluster economic growth. A more reasonable forward P/E ratio under these conditions is typically in the 15-to-16 range.
The reward for owning stocks over risk-free debt appears relatively small. Compared with Treasuries, stocks are priced to offer just about 180 basis points (or 1.8 percentage points) more, a huge disconnect from the prior decade’s average spread of 350 basis points.
Wall Street’s 2023 outlook for U.S. stocks looks concerningly unrealistic. Equity analysts currently project that S&P 500 company earnings will be $230 per share next year. Morgan Stanley expects $195, based on our belief that companies’ extraordinary ability to boost sales and profitability in recent years is unsustainable and may soon reverse.
“We continue to believe it is premature to call an end to the bear market for U.S. stocks. Investors may have moved on from inflation concerns, but they cannot ignore the economic picture. For now, investors should consider reducing U.S. large-cap index exposure. Instead, look to Treasuries, munis and investment-grade corporate credit. Stay patient and collect coupon income”, Shalett concluded.
This article is based on Lisa Shalett’s Global Investment Committee Weekly report from November 21, 2022, “Bonds Over Stocks in 2023.” If you would like to read the article in its full version you should click on the link below.
Janus Henderson Investors released the findings of its 2022 Retirement Confidence Report, which seeks to better understand how self-directed investors are coping with this year’s challenging market environment.
According to the report, which is based on a survey conducted by Janus Henderson, rising inflation and stock market volatility are weighing heavily on investors, as 86% of survey respondents are concerned or very concerned about inflation and 79% are concerned or very concerned about the stock market.
Further, 45% of investors said they felt less confident in their ability to have enough money to live comfortably throughout retirement, and 9% have hired or planned to hire a financial advisor in 2022. Notably, less than 2% are planning to change financial advisors as a result of the market downturn.
“With both stocks and bonds posting three consecutive quarters of negative returns in 2022, investor confidence has suffered, but it hasn’t collapsed,” said Matt Sommer, Head of Janus Henderson Investors’ Defined Contribution and Wealth Advisor Services Team.
“The Covid-19 stock selloff and quick comeback that occurred in 2020 put a spotlight on the challenges of timing the markets and remains a vivid example of the importance of creating and sticking to a plan in all types of markets,” he added.
Cash Isn’t King as Investors Eye Market Rebound
Despite concerns surrounding inflation and the stock market, just 13% of investors have moved money out of stocks or bonds and into cash. Instead, investors appear to be tightening their budgets, as nearly half (49%) said they have reduced their spending or plan to reduce spending as a result of the financial markets and rising inflation.
Expectations for better days ahead might also explain why more investors have not moved to cash. The majority of respondents (60%) believe the S&P 500 Index will be higher one year from now, 26% believe the Index will be lower, and 14% expect it will be relatively unchanged.
Strong Desire for Dividends
The preferred investments for generating income in retirement in the current environment include dividend-paying stocks (65%), annuities (24%), taxable bonds (23%), and tax-free bonds (23%).
“The good news is that many investors are taking the common-sense approach of reducing their spending and not moving out of stocks in response to this year’s challenging market environment,” added Sommer. “It’s also encouraging to see that some are seeking the advice of a professional advisor to navigate the current market uncertainty.”
Methodology
The survey was conducted by Janus Henderson Investors in October 2022, and was distributed within its Direct Business Channel (DBC) to a randomly selected group of investors age 50 and older who were the sole or shared financial decision-maker for their households. The DBC caters to self-directed U.S. investors who have established accounts directly with Janus Henderson and without the assistance of a financial professional, some of whom may consult with an advisor for other aspects of their wealth. The final sample consisted of 1,926 investors who completed the full survey.
Santander Wealth Management & Insurance, the division that includes Santander’s private banking, asset management and insurance units, believes growth and inflation will still be causes for concern next year; but markets are already showing signs of a comeback.
“We expect that confirmation of peak inflation in Q1 2023 may lead to a pause in interest rate hikes by central banks, which would set in motion the recovery process in fixed-income markets”, said Víctor Matarranz, global head of Santander Wealth Management & Insurance, in his opening letter in the 2023 Market Outlook report titled The great rate reset. According to Matarranz, “The recovery of more cyclical assets, like equities, should get underway inH2 2023 if central banks announce lower interest rates. More than ever, it is paramount to balance a short- and long-term vision when managing investments”.
Santander expects a macroeconomic shift, with efforts to stabilize prices already entering final stages. “We believe that we are close to terminal policy rates and that the level of monetary tightening reflected in the curves will be enough to change the course of inflation. This phase of monetary stabilization will probably last most of 2023 as we do not expect a rate cut until there are clear signs that inflation is under control. The good news will come first to defensive assets (fixed income) and then to cyclical assets (equities)”, according to the report.
Santander says that, while inflation won’t peak at the same time in every market, there’ll be “clear signs of a trend shift” in Q1 2023.
It also expects low growth in the coming quarters, with moderate recession in some countries. Nonetheless, “it seems unlikely that the economy will see the same upheaval as in previous crises like the financial crash of 2008 and the dotcom bubble of 2000”.
The report suggests that “progress in monetary stability would provide plenty of opportunities in fixed income assets as yields stabilize at very attractive levels relative to the previous decade”. It also says that “rate increases have been the villain of the markets in 2022 but going forward they provide a bedrock of safe yield. Conservative investors are celebrating the fact that liquidity is no longer penalized”. Better bond yields will encourage investors to diversify portfolios. For corporate bonds, the report recommends increasing credit risk in portfolios amid an expected end to economic slowdown.
Santander also advises a cautious approach for equities, until earnings’ review are completed, so investors will have to wait. “Earnings forecasts are being revised”, says the report, but there could be more downwards adjustments, in line with predictions of a slowdown in 2023.
Also, due to shifts in structural inflation (above 2% in the midterm),the report encourages investors to take up more shares, infrastructure, property and other real assets. Alternative investments, especially in private equity and private debt, are also key.
The report affirms that, as interest rates stabilize and the economy recovers, the market will shift focus back to innovative, high-growth companies. The most attractive opportunities will be in biotechnology, energy transition, cyber security, foodtech, robotics, sustainability, with renewable energy at the top of the list owing to the energy crisis.
Photo courtesyGabriel Micheli, Senior Investment Manager at Pictet Asset Management
The past 30 years have seen a bigger improvement in human prosperity than all of the past centuries combined. We have built more roads, buildings and machines than ever before. More people are living longer and healthier lives and access to education has never been better.
The average GDP per capita has grown 15-fold since 1820. More than 95 per cent of newborns now make it to their 15th birthday, compared with just one in three in the 19th century.[1]
However, such progress has come at a great cost. As humanity has thrived, nature has suffered.
Humans are driving animal and plant species to extinction and destroying their habitats to feed and house an ever-increasing population. An influential UN report warns that up to one million animal and plant species are at imminent risk of extinction.[2]
Data shows that, in the 1992-2014 period, the amount of capital goods – such as roads, machines, buildings, factories and ports – generated per person doubled. Over the same timeframe, however, the world’s stock of natural capital – water, soil and minerals – per person declined by nearly 40 per cent.[3]
Policymakers now consider biodiversity protection as urgent a priority as halting global warming.
The UN COP15 biodiversity summit in Montreal in December is expected to unveil ground-breaking targets to protect nature. Ahead of the landmark event, world leaders meeting in Egypt for the COP27 climate conference in November recognised nature’s role as a key solution to fighting global warming.
According to the draft agreement, the Montreal Accord will commit signatories to restore at least 20 per cent of degraded ecosystems, protect at least 30 per cent of the world’s sea and land areas and reduce pesticides by at least two-thirds.
Once these targets become national policy, policymakers and regulators could quickly establish a framework for biodiversity protection and disclosure, with the Paris Accord and net zero as the template.
Biodiversity finance: a burgeoning market
Intensifying political and regulatory efforts are a step in the right direction. But policymakers cannot turn the tide on their own. Businesses and investors must also do more to place the world on a path to sustainable growth.
As stewards of capital, investors are uniquely positioned to help build an economy that works with, rather than against, nature.
They can play a crucial role by helping to shift capital flows away from businesses and projects that degrade the natural environment and towards nature-positive solutions.
Historically, biodiversity finance has tended to focus on raising money for conservation activities within a philanthropic framework. More recently, however, a market for biodiversity and natural capital investment has been steadily growing, including securities that explicitly aim to minimise biodiversity loss and capitalise on the potential for long-term capital growth.
There have been high-profile launches of funds investing in companies specialised in biodiversity restoration and ecosystem services in the past couple of years, with nine out of eleven such funds having debuted since 2020. Assets under management in this group have more than doubled to USD1.3 billion from just USD525 million at the start of the decade.[4]
Funds investing in biodiversity and natural capital aim to help embed more sustainable and regenerative business practices across a whole value chain, involving industries such as agriculture, forestry, IT, fishery, materials, real estate, consumer discretionary and staples, utilities and pharmaceuticals.
The Food and Land Use Coalition estimates that efforts to transform current food and land use in favour of regenerative and circular practices have the potential to create a biodiversity market worth USD4.5 trillion by 2030.[5]
Nature-positive transition The finance industry must add its heft to the global effort to reduce the damage, while also enhancing nature’s recovery. One influential research initiative geared to helping this endeavour is the Finance to Revive Biodiversity (FinBio) research programme, which is overseen by the Stockholm Resilience Centre at the Stockholm University.
The four-year research programme, of which Pictet Asset Management is a founding partner, aims to develop valuable research that should help the finance industry transform current practices, which reward growth at the expense of biodiversity, to a new model which accurately captures – and attaches an economic value to – the nature-positive quality of a business.
The initiative brings together a diverse consortium of academic and financial-sector partners, including the UN Principles for Responsible Investment, the Finance for Biodiversity Foundation and Oxford University.[6]
Nature has always been the economy’s most important asset. It is time the finance industry recognised that.
For the latest research on biodiversity and why it is a financial risk you cannot ignore, click here.
Notes
[1] Our World in Data
[2] IPBES
[3] Source: Managi and Kumar (2018) Note: Produced capital refers to roads, ports, cables, buildings, machines, equipment and other physical infrastructures. Human capital refers to education and longevity. Natural capital is calculated with renewable and non-renewable resources including agricultural land, forests as sources of timber, fisheries, minerals and fossil fuels
[4] Broadridge and Pictet Asset Management, data as of 31.07.2022
U.S. equities rebounded in October, with the S&P recording its second-best monthly performance for the year. This month saw the kickoff of Q3 earnings with over half of the S&P 500 companies having reported through 10/28. Takeaways from the first few weeks of earnings included FX headwinds, continued supply chain disruptions, still-elevated raw materials costs and fears of a weakening macro backdrop. However, credit card companies and banks reiterated that consumer spending continued to show signs of resilience despite surging inflation.
Several catalysts will be in focus as potential drivers to push markets higher before year-end, such as an inflection point in the Russia-Ukraine war, U.S. midterm elections or inflation data indicating that prices are no longer rising.
Performance in the Merger Arbitrage space in October was driven by the closing of several deals, most notably Elon Musk’s $44 billion acquisition of Twitter, Berkshire Hathaway’s $12 billion acquisition of Alleghany, and Vista Equity’s $8bn acquisition of Avalara. The strategy also benefitted from a bump in consideration in two transactions. Philip Morris raised its offer for Swedish Match from SEK 106 to SEK 116 per share in order to secure enough shareholder support to complete the transaction. Additionally, Flagstar Bancorp shareholders received an increase in terms of $2.50 per share, which was paid as a special dividend, as they awaited the final regulatory approvals needed to complete the merger with New York Community Bancorp.
For the convertibles market, the fourth quarter on a positive note after a very negative year. Sentiment was quite low coming into earnings season and the result has been generally positive. We had numerous holdings outperform significantly after beating what were admittedly low expectations. We also had a few surprises to the downside as some companies guided cautiously. Premium expansion as stocks moved lower helped limit some of the downside we saw relative to the underlying equities. This is a key attribute of convertibles as it helps to provide asymmetrical returns.
Bolton Global Capital is continuing to recruit new Advisor talent in the Miami market. The firm has announced that Arturo Hierro, most recently of Loyola Asset Management, has joined the firm.
Hierro has over 20 years of industry experience in the United States, in addition to having previously worked in the industry in Mexico.
His clientele consists primarily of high and ultra-high net worth individuals located in Mexico and the United States.
“Arturo is a top professional and we are glad that he has decided to join Bolton in our Miami office” according to Ray Grenier, CEO of Bolton. “By combining his experience at successfully growing his book of business with Bolton’s global wealth management capabilities, Arturo will be in a position to strongly expand his practice.”
Established in 1985, Bolton Global Capital is an independent FINRA member firm with an affiliated SEC Registered Investment Advisor. The firm manages approximately $12 billion in client assets for US-based and international clients through 110 independent financial advisors operating from branch offices in the US, Latin America and Europe, according the firm information.
This year, incMTY, the entrepreneurship festival promoted by the Tecnológico de Monterrey, successfully concluded its tenth anniversary. In this edition, the ecosystem of Mexico and Latin America interacted and developed opportunities through the in-person attendance of more than five thousand people and another 5,000 more who attended the event virtually, reaching 10 thousand people.
incMTY has become the most important economic vehicle in Latin America for the generation of business opportunities. Proof of this was that this year the festival broke its own record by presenting and announcing more than 300 million dollars in venture capital investment. Likewise, new projects were presented by the Government of Nuevo León, the private sector and renowned international companies, with more than 2.6 billion dollars in direct foreign investment.
More than 300 national and international speakers; 50 venture capital and corporate venture capital firms participated in the ‘Founders & Investors Summit and Corporate Innovation and Venturing Forum’; key players from more than 20 countries representing the ‘quintuple helix’ (entrepreneurs, investors, academia, governments and IP) with 406 activities; and on demand content hosted on the Whova App (available until December 9).
Rogelio de los Santos, president of Tec’s Eugenio Garza Lagüera Entrepreneurship Institute, commented that “there is much to build and contribute to the world, but incMTY today is already a powerful platform where opportunities and innovation multiply”.
Presentation and investment announcements at incMTY 2022:
Government of the State of Nuevo León and Invest Monterrey: US$2.6 billion. Samuel García Sepúlveda announced this figure as part of the impact of foreign investment. Likewise, through the Ministry of Labor and the Directorate of the State Employment Service, he earmarked 1 million pesos for companies located in Nuevo León, with the aim of promoting responsible entrepreneurship with a focus on generating new jobs.
Daikin Industries: 300 million dollars. The number 1 Japanese air conditioning company in the world recently announced this amount of investment in Mexico. In addition, starting in 2022 Daikin, along with INCmty, work for innovation in the HVAC industry (Heating, Ventilation and Air Conditioning, for its acronym in English). Through the entrepreneurship challenge ‘incMTY Disruptair Challenge’, 70 disruptive projects participated and these are the three winning teams: SolarX (first place), Flair (second place) and Bono (third place).
Proeza Ventures: US$50 million. The Proeza group’s capital fund announced that it will invest in 15 startups related to mobility issues. Its mission is to discover visionary entrepreneurs and build startups that transform the mobility industry to create a more sustainable world.
German Society for International Cooperation (GIZ): US$15 million for the Catalyst – Climate Fund.
Nekko Capital: US$10 million, a venture capital fund based in Barcelona, Spain aimed at early-stage companies, announced its ‘Seed Capital Fund’.
99 Startups: $1.1 million. This venture capital fund that seeks to finance pre-seed and seed stage startups, announced its participation in an investment round in Cuéntame, a platform with artificial intelligence that provides the appropriate wellness resource for each person and three family members, according to their stress level and time of life; with this they will seek to consolidate their presence in Mexico, Colombia and Chile.
Alaya Capital: US$1 million. The venture capital fund of entrepreneurs for entrepreneurs located in Chile, is about to raise its third fund and expects to reach US$80 million to invest approximately US$1 million in at least 25 startups that are in the regional scaling stage. It has funded companies such as Betterfly, Lemon and SixClovers.
Municipality of Monterrey: 5 million pesos. Luis Donaldo Colosio Riojas, Municipal President of Monterrey, launched the first Municipal Fund for Technology-Based Entrepreneurship.
During the festival, a collaboration signing and launch of the Kuikmatch-Alianza del Pacífico platform took place, for 100 thousand dollars equity-free, destined to promote the science and technology-based ventures winners of its call for proposals.
incMTY’s most impressive capital raises:
Betterfly, considered the first Latin American “social” unicorn, exhibited at incMTY how it raised $125 million in a Series C investment round.
During the Founder & Investor Summit, emphasis was placed on the $100 million investment in SparkCognition, where Dalus Capital participated as a partner of March Capital for the growth of this company, a world leader in artificial intelligence for industrial applications.
Yaydoo, the ‘B2B paytech’, announced its $20.4 million capital raise and merger with PayStand to serve all SMBs in the Americas. As of today, its valuation exceeds $2 million.
Mercado Libre Fund, which invests in technology companies, typically in Series A and B rounds, announced during incMTY $20 million in the Elenas platform.
Autolab, an auto parts and repair platform, announced raising $6.5 million in a Seed+ round of equity and debt led by Bullpen Capital, with participation from Proeza Ventures.
Orchata, a Mexican startup led by its founder, Luis Mario García, offers the promise of “we deliver your groceries to your door in 15 minutes” and to begin its expansion it raised US$4 million in an initial round in which Y Combinator, JAM Fund, FJ Labs, Venture Friends, Ivesto and Foundation Capital stood out as investors.
Nowports, a Regia-based company and the first LogiTech unicorn in Latin America, detailed during incMTY about its valuation with its Series C milestone led by SoftBank Latin America Fund.
Calii, the Mexican startup that connects fruit and vegetable producers directly with homes, restaurants and retailers, mentioned raising $22.5 million in capital.
Safra New York Corporation, the parent company of Safra National Bank of New York, announced that it has entered into a definitive agreement to acquire Delta North Bankcorp and its subsidiary, Delta National Bank and Trust.
Delta provides private banking and wealth management services to high net-worth clients through its offices in New York and Miami.
The acquisition is a strategic extension of Safra National Bank of New York’s private banking business both in the United States, and throughout Latin America, where it has been providing premier private banking and financial services to high net-worth clients.
With this transaction, the J. Safra Group will strengthen its private banking business and global wealth management capabilities.
Jacob J. Safra, Chairman of Safra National Bank of New York, commented: “This transaction highlights the importance of the Latin American market for the J.Safra Group and represents an attractive opportunity to expand our position in the region. It is a market we know very well and in which we have achieved a highly regarded presence for our clients. Delta’s private banking business fits perfectly with the strategic vision of Safra National Bank of New York.”
Simoni Morato, CEO of Safra National Bank of New York, said: “This transaction underscores our strength as one of the premier brands in Private Banking globally. We look forward to welcoming Delta’s clients and employees to our organization in New York and Miami. Together, we are confident that we will add immeasurable value to clients.”
Guillermo Sefair, Chairman and President of Delta National Bank and Trust Company: “It is an important transaction between two family-owned international private banks, with common principles and values. We are fully committed to this new chapter to continue to bring excellence and quality of services to our clients and employees.”
The acquisition is expected to be completed during the course of the first half of 2023, subject to regulatory approval. Financial terms are not disclosed.
With the results of the midterm election results known, in which Republicans won a majority in the House of Representatives and Democrats held the Senate, it appears the next two years will be one of legislative gridlock, says a PIMCO report.
“We believe the practical implications for markets and the economy are largely the same whether the Republicans had won only the majority in the House or whether they had won both the House and Senate. After all, a majority is still a majority, and the main levers of a party not in the White House – namely, obstruction and oversight – will be available to House Republicans despite their slim majority and control of only one chamber,” says the analysis by Libby Cantrill, a specialist in Public Policy.
In this sense, the expert highlights four essential points.
First, a total freeze is expected on President Biden’s legislative agenda, where perhaps most important for markets is that all tax hikes, whether personal or corporate, have been eliminated. This suggests that the next tipping point for taxes will be in 2025, when Trump’s tax cuts expire.
On the other hand, there will be more oversight. House Republicans will flex their oversight powers on issues from the Biden administration’s energy policy to its approach on China (which, in some circles, is thought of as not sufficiently hawkish) to the Securities and Exchange Commission’s panoply of proposed regulations.
Oversight is likely to be more symbolic than substantive – after all, without veto-proof control of both chambers of Congress, there is little Republicans can do to alter policy. However, increased oversight can slow down the regulatory gears and make it more cumbersome to advance policy for any White House.
While the Federal Reserve is also likely to be an object of oversight – from both sides – we doubt the Fed will be sensitive to any political pressure to change its seemingly singular focus on combatting inflation
Third, the specialist predicts more fiscal fights. The Republican majority in the House of Representatives may be conducive to a source of market volatility next year.
“With little or no cushion for losing votes in Congress, it may be more difficult for the future Speaker to navigate upcoming fiscal tipping points, particularly the need to raise the debt ceiling, given that some in the Republican caucus have indicated they will not support any debt limit increase without commensurate spending cuts, something that is not a win-win for the Democratic Senate and the White House,” the report adds.
PIMCO’s assumption is that the statutory debt ceiling will be reached by the end of this year, but the Treasury Department’s extraordinary measures will extend that deadline to the fall of 2023.
However, despite the expected maneuvering and associated potential volatility, especially at the front end of the yield curve, the firm believes the Republicans will eventually cave in the House of Representatives and the debt ceiling will be raised.
“Keep in mind that the 2024 presidential campaign will be in full swing by then, and Republicans are unlikely to sacrifice a chance at the White House,” the expert clarifies.
Finally, less fiscal support is expected. While it is still believed that there will be bipartisan support for ongoing aid to Ukraine and for the defense budget, we also believe there will generally be a higher threshold for providing broader countercyclical fiscal support, even if the economy slows.
The U.S. economy has already experienced a significant fiscal contraction in 2022 by virtue of the withdrawal of many of the COVID-related programs, and next year we can expect more contraction, in the face of which a divided Congress is unlikely to do anything. In other words, just as the “Fed call option” has been eliminated, so too has the “tax call option” been eliminated, at least until a new Congress comes to power in 2025.
Compromise?
While our expectation is largely for gridlock in the next Congress, we do foresee some areas of potential compromise. These include legislation that could bring better clarity to the regulatory remit on cryptocurrencies – a need that is even more urgent given recent crypto exchange issues – and energy-permitting language that could expedite both traditional and renewable energy projects.
How will the markets react?
While past is certainly not prologue, the equity markets historically have tended to do well in years of split government. Indeed, in previous years of a similar composition of power in Washington – namely, a Republican House, Democratic Senate, and Democratic White House, the equity market has returned on average 13.6% (per S&P 500 data), a higher average return than almost any other composition of power. Of course, 2023 may look quite different from history given sticky inflation, recession risk, and war in Ukraine.
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