As the election draws closer and US economic data remains mixed at best, it’s worth highlighting the rising levels of uncertainty.  There is a clear observable rise in discomfort among consumers and small business about the outlook. The risk is that this uncertainty translates into softer real activity. The following charts and analysis discusses these trends and the investment implications.

1. Small business wary of the political environment

The below chart from Business Insider shows the percent of small business owners citing the political climate as a reason not to expand. This indicator has reached an all time high, surpassing levels seen during the government shutdown.  The reason seems obvious, the polls are close and the candidates are extremely polarizing – and it remains to be seen what economic policy would really look like under either of the presidential candidates. Thus small businesses are right to feel uncertain about the political climate, and this is likely having a real impact on their day to day business decisions.

2. Consumers also more uncertain on the outlook

This graph from Bloomberg displays a clear surge in uncertainty (consumers’ uncertain about business conditions over the next 12 months). Lining it up with the chart above, it’s clear that this is being driven by politics… for Trump supporters the prospect of a Clinton presidency is likely a frightening and morose one, while those hearing of Trumps radical plans and campaign trail bluster would be likewise concerned about the prospects of a Trump presidency and what it might bring. While this sort of uncertainty may not have a huge impact on consumer spending decisions, anything like hints of tax cuts may see consumers delaying purchase decisions in anticipation of better finances or shoring up their savings if they foresee grim times ahead.

3. Rising policy uncertainty means a higher required risk premium

This graph from Topdown Charts posted on Seeking Alpha goes to show that the equity risk premium is generally higher when policy uncertainty is higher – this would imply, at the margin, that political risk and uncertainty is tending to push up the cost of capital. However minor this effect may be, it presents a challenge for big business – and big business is surely feeling the same way as the consumer and small business about the levels of uncertainty. It also comes at a time when corporate America has seen a slump in earnings, and the outlook for corporate profits still remains subdued.

So what?

So in short you have the major parts of the real economy all facing increased uncertainty. Whether it means delayed decisions, precautionary saving, scaled down commitments or just a general sense of unease – it’s easy to argue that the polarizing nature of this election campaign is having a negative impact on confidence and the real economy. Thus for the next couple of months we should expect ongoing uncertainty and more political risk, not less, and this will likely start to show through more and more in the data. It will almost certainly slice at least a couple of basis points off the confidence surveys e.g. PMIs, NFIB, consumer confidence.  But it has the real potential to put a dampener on the hard data too like retail sales, durable goods, and payrolls.

It should be a temporary phenomenon however, so the focus will need to switch from the topic of uncertainty to the topic of certainty – come November we will have certainty about the presidential election outcome (hopefully!). At that point firms and consumers will begin to act accordingly…

For markets it means more volatility, and a minor headwind to earnings.

Final chart – food for thought, the presidential election poll spread vs the S&P500…

Bottom line: Rising political risk in the US is already driving uncertainty higher and confidence down, this will likely have a negative impact on the real economy and continues to pose a threat to markets.