
Independent Thinking®
The Market Impact of the U.S. Elections
April 24, 2016
Investors of all kinds are keenly interested in the 2016 U.S. elections, which feature not just the presidential election but the entire lower House and one-third of the Senate as well.
The elections will be consequential for markets, whatever the outcome. Here are a few suggestions for assessing market impacts, and a look at the candidates’ positions on policy issues and their likely impacts.
First, some suggestions on keeping this race in perspective:
- Candidates’ statements sometimes create headline risk for markets today. At present, candidates are trying to motivate voters, not talk to markets. But occasionally campaign statements and markets collide and produce headline risk that affects sectors and industries, as with Hillary Clinton’s vow to regulate drug pricing. Clinton’s first statement on drug pricing in September 2015 caused the Nasdaq Biotechnology Index to fall by almost 5% that day, even though there is practically no chance that drug pricing regulation would happen in either 2016 with a Republican Congress, or 2017 in a likely divided government. Subsequent statements by Clinton and other candidates have helped to keep pharmaceutical and biotech stocks volatile for months.
- What a candidate says does not predict performance in office. Campaign statements are not accurate predictors of future presidential action. Once in office, the new president must navigate policy and political realities that change priorities and attainable policy goals. For example, President Obama entered office vowing to increase domestic spending and curtail military spending, but had to compromise with Congress to achieve budget and spending deals that have kept both flat to slightly positive in recent years.
- Congress matters: No new president will have a free policy hand. Congress writes the bills; the president makes them law. The makeup of Congress is as important for U.S. policy direction as who becomes president: What policy issues get jointly prioritized and acted upon will provide the real policy sparks and market impacts in 2017. At present, we think Republicans will maintain their current majority in the House and will have either a small majority or a large minority in the Senate. So, for example, a President Clinton would have to compromise with Congress to achieve anything.
As of writing, Clinton is the almost-certain Democratic candidate and the likely next president. Donald Trump is the Republican front-runner, but if he does not win an outright delegate majority, another candidate could be selected at the convention. Here we provide policy contrasts that illustrate some sectoral and industry impacts of Clinton vs. Trump or Clinton vs. another Republican in the general election.
- Trade/Exports: Clinton opposes the Trans Pacific Partnership, or TPP, but we expect that as president her views would moderate, which would be positive for exporting industries like technology and agribusiness. Trump opposes TPP and other free trade deals. Trump’s election would probably make other trade deals much less likely, which would be market negative for exporting industries. A non-Trump Republican is likely to be more positive for trade and exports, with corresponding positive impact on U.S. exporting industries.
- Climate change: All Republican candidates are opposed to new environmental regulation and desirous of rolling it back, which would be positive for fossil fuel industries. Ted Cruz opposes ethanol subsidies, while Trump supports them. Clinton will continue the Obama push to promote green energy at the cost of fossil fuels.
- Immigration: Clinton is likely to try to regularize unauthorized migrants and to expand larger numbers of high-skilled migrant visas, a positive for tech, hotels, and restaurants. Most of the other Republicans are similarly supportive; Trump opposes, but recently has softened on high-skilled workers, which would be a positive for technology industries.
- Health care: Republicans would repeal and replace the Affordable Care Act, or ACA; encourage more competition among plans; and keep coverage of pre-existing conditions. Trump wants government to negotiate drug prices. Clinton would improve the existing ACA framework and keep the individual mandate. Clinton also wants to regulate drug pricing and stop inversions, both market negatives for the pharmaceutical industry.
- Tax reform, repatriation, inversions: Both Clinton and the Republicans are likely to seek business-friendly tax reform, including repatriation. Trump’s tax plan is the most aggressive, and so would be the most positive for U.S. business generally. Clinton’s tax plan, we think, would also be positive for U.S. business but would be more incremental than that of any Republican. Clinton also wants to expand anti-inversions regulation, a market negative for inverting industries including pharmaceuticals.
- Housing: Any Republican candidate is likely to privatize housing finance and push for a larger private sector bank role. Clinton will want to maintain a prominent role for government in housing finance and support affordable housing. On balance, we think Clinton would be marginally more positive for housing.
- Mergers and acquisitions: Any Republican candidate would support a freer merger and acquisitions environment, and would not want government picking industry or sector winners and losers, a generally business-positive result. Clinton would continue the current antitrust approach and also would seek to use anti-inversions laws and rules as a policy tool.
- Defense: All Republican candidates express pro-defense policies: Cruz and John Kasich are conventional defense posture candidates, but Trump expresses isolationist and noninterventionist instincts that could change deployments of forces, weapons and systems, and have corresponding market impacts. Clinton also is a conventional defense adherent. So Clinton and Republicans, apart from Trump, are broadly positive for defense industries. Any new president would be constrained by current and future budget and spending deals that have kept defense spending largely flat over the past few years.
The fundamental question for financial markets in the 2016 presidential election is not whether a Republican or Democrat wins the presidency. It is whether establishment or insurgent candidates are nominated and whether there is a possibility that an insurgent candidate may become the next president. Establishment candidates of either party can be expected to work within well-trodden policy parameters and contribute to broader U.S. policy stability, therefore providing more comfort and certainty to the markets.
If an insurgent candidate wins one of the nominations, political and policy uncertainty increases, because new and untried policy solutions become real possibilities. Many policy solutions of insurgent candidates of either party have more in common with each other than with the consensus positions in their own political parties. Trump versus other Republican candidates on trade is a prime example: As discussed, Trump’s position on trade is markedly different from that of other Republican candidates as well as Clinton, and likely would have negative market effects. A Trump presidency also could have some positive market effects: For example, Trump’s desire to aggressively reform the U.S. tax code to make U.S. business more competitive in world markets would generally be a market positive for U.S. business.
Today, establishment candidate Clinton is the overall presidential favorite: Her election and the resulting consistency of approach with the outgoing president would likely be a general market positive after the election.
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