28 Oct 2016 November 9th
This year’s presidential race has destroyed any remaining remnants of normalcy in our country’s quadrennial ‘peaceful’ transition of power. The breadth of its chaos has shattered precedents in civility, legality, political polling, expectations, and reporting. Both candidates have survived what almost certainly would have led to the political demise of anyone else just four years ago. So it is understandable why so many are so deeply concerned about the stock market and our economy after November 8th.
While history has not been a good predictor of any part of this election year, a review of how markets have behaved in past presidential elections is still a good place to start. According to Stephen Suttmeier, technical research analyst at BofA Merrill Lynch in a article by Mary Ann Bartels, “since 1928, the Standard & Poor’s 500 has dropped an average of 2.8% in presidential election years that don’t include an incumbent seeking reelection. In fact, of the eight years in a two-term presidential cycle, the final year of the second term—when the incumbent can’t run—is the only one that has averaged negative market returns,” Suttmeier says. So historically speaking, next year should be OK.
Markets do not like uncertainty, and much of it, at least where economic policies are concerned, lies with Mr. Trump. He has been specific as to direction of his policies (lower taxes, reduced regulations, reduced immigration, replacement of Obamacare and hands off entitlements, but he has been light on specifics. Clinton, on the other hand, is more known for both the direction and the substance of her economic policies. She will increase taxes on the upper classes, dissuade corporations from leaving the US by using taxes and tariffs, increase business regulations, expand entitlements, attempt to improve Obamacare, and spend significantly on infrastructure.
Specifically, how will each candidate impact our economy and markets? Let’s take Mr. Trump first, since he is the wildcard. Like Republicans before him, Mr. Trump wants to lower taxes to spur the growth of the economy, but analysts have said the cuts will dramatically increase the nation’s debt. But this conclusion gives no credence historical fact that lower taxes and regulations do indeed spur growth. Many complicating factors like mood of the country, wars, political and civil unrest, direction of the economy are just a few that make quantifying growth potential difficult. And indeed, today few factors outside of interest rates are positive for significant growth.
But, there are significant precedents in US history to support the theory that tax and regulatory cuts promote economic vitality. John Kennedy (D) cut taxes in 1961 and the economy took off. Of course the young Baby Boomer generation and their Greatest Generation parents’ spending on houses, furniture, appliances, and cars were in the right place at the right time. Then in 1981, Ronald Reagan (R) did the same thing. For him, the trend of the economy was negative, following a long miserable run of civil unrest, Iran’s holding hostage 52 Americans for 444 days, and the lost decade of the 70’s to high inflation and low growth. But by 1983, Reagan’s tax cuts and confident leadership took hold to propel economic growth by 4.5% and 7.2% in 1984.
Many who criticize the benefits of tax cuts for economic growth point to the fact that government deficits often explode in the years that follow. They are right in part, because government spending often increases following tax cuts, along with the economic growth. It’s not the tax cuts that cause the growth in deficits and debt, its the undisciplined government spending that follows that is almost always due to expediency of Congressional deal-making in order to get the tax cuts passed in the first place without regard to the long-term consequences. Both parties share in the blame of unbridled spending in good times and bad.
When government surpluses from explosive economic growth are not used to pay down debt from prior excesses, but are instead channeled into growing government entitlement programs, the economy ultimately suffers. Economies rise and fall, but entitlement spending continues to rise, which pulls increasing amounts of capital away from the productive private sector into the unproductive bureaucracy of government, stifling growth.
Mr. Trump, while espousing familiar Republican policies that generate predictable results, is anything but a predictable candidate, rattling the confidence of many. But the balance of power that is built into our system of governance will prevail after this crazy election is over. There will be 535 men and women in the US Congress to work with, and to counter when necessary, the directives and polices of Mr. Trump, should he become the next president.
Mrs. Clinton, on the other hand is a much more knowable candidate, at least where policy is concerned. She has said her social policies will continue the path set by Mr. Obama and her economic policies will be spearheaded by her husband, former President Bill Clinton. If history is a guide, we can take hope in Bill’s ability to compromise and work from the political middle. During his first term in office he was handed a major defeat in 1994, when Republicans regained majorities in the House and Senate, largely due to New Gingrich’s Contract with America. Mr. Clinton ably pivoted to the middle to work quite effectively with the Republican Congress to reduce taxes on small business, reform welfare, and rein in runaway litigation.
Mr. Clinton is given significant credit for the huge economic boom of the 1990’s. But again, the economy is significantly more complicated than a single president’s leadership. A new economic phenomenon known as the World Wide Web running on the backbone of the government-built Internet, was supercharging and ‘super-changing’ virtually every aspect of education, business, and the economy. Internationally, an impending unified European trading block, known as the European Union, forced American multinationals to get leaner and more competitive.
While there is no Internet-like boom on the near horizon for us today, there is a glimmer of hope that Mr. Clinton, as part of Mrs. Clinton’s team, will once again demonstrate an ability to work with a divided Congress for the good of the country. It is also likely that Mrs. Clinton will govern more conservatively than her campaign talk which is designed to keep Bernie Sanders’ voters engaged in the campaign. She will push for investments in infrastructure, research and development, and education which the private sector generally cannot touch. These investments are overdue and vital to this country’s future. However, they do not in and of themselves, drive our economy forward toward the 3%, 4% or 5% growth that the American economy is capable of, only the private sector can do that.
There’s one more huge uncertainty facing the market in this election – who will win? Pollsters and polls have been steadily predicting that Hillary will take the prize. She how has a 4-5 point in the polls. Professional pollsters are very good at statistics, but this time, this very unique time, we have to wonder if they are as good at sampling as they and we think they are.
BREXIT revealed how badly modern pollsters can miss when they don’t sample well. Just days before the vote, polls were showing that 48% of Brits would vote stay while 46% would vote leave. In fact, with a whopping 72% turnout, the results would shock the world with 52% vote to leave and 48% to stay. Pollsters failed to sample the level of dissatisfaction with the EU and its policies and how big an impact that dissatisfaction would have on turnout.
If there’s one thing I have learned to avoid in this year’s political circus, it is predictions. But I will go out on a limb to suggest that the markets have already largely factored in what is known and adjusted for what is unknown. Markets are sufficiently robust to withstand yet another quadrennial ‘peaceful’ transition of power.