A Democratic election sweep could increase swings in US stocks and bonds through deeper disputes over government spending and borrowing, a veteran investor told Bloomberg Television on Nov. 5.
The investor described the initial market response as positive but expected harder negotiations in Washington. The economy could continue to perform well despite those disagreements.
Speaking on Insight, the investor linked the early gains to hopes that President Donald Trump would work with Democrats and that the election result could help bring a diplomatic solution to the Iran war.
Lower oil prices could then help bring inflation down within a couple of months if the decline persisted. That would reduce pressure on the Federal Reserve to keep raising interest rates.
Budget negotiations presented a more immediate political obstacle. An agreement would be needed before the end of the year to avoid another government shutdown, with any closure extending into January requiring negotiations with the new Congress.
Disputes could also involve the debt ceiling, the legal limit on federal borrowing, and the war. The investor expected those disagreements to produce more market swings without necessarily causing broader economic trouble.
Divided government could constrain spending proposals from both parties. The investor considered Trump's proposed defence budget increase of about $500 billion unlikely to pass, along with Democrats' proposals for Medicare for All.
“Gridlock does have some benefits,” the investor said, describing limits on large changes in government spending. However, reaching an agreement could prove difficult if bond investors demanded higher yields over concerns about federal finances.
Treasury yields around 5% looked attractive. The case for buying a 10-year Treasury depended partly on confidence that productivity gains would lower inflation, while stocks were expected to outperform bonds over the longer term.
The investor also compared bond yields with stock valuations. A 5% yield corresponded to a forward price-to-earnings ratio of 20, a measure comparing share prices with expected profits, against a current ratio of 18.5.
Political opposition and tighter access to borrowing could slow the construction of artificial intelligence infrastructure. Resistance from communities to data centres added another constraint on companies' spending plans.
Those limits could benefit large cloud computing companies by curbing spending and borrowing that the investor considered too rapid. The interview did not establish how much construction might slow or which projects would face restrictions.
The investor expected stock gains to spread beyond the largest technology companies, with smaller companies, healthcare and financial shares participating. Possible resistance to data centres in states including Texas could redirect construction elsewhere, with Mississippi and Louisiana mentioned as alternatives.
