Neither a Trump Nor a Clinton Victory Will Be Market Friendly

Neither a Trump Nor a Clinton Victory Will Be Market Friendly
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"As a writer, I have readers who will have a range of political views. I don't think they look to me for political guidance."

--Alexander McCall Smith

Let me start by saying that I take the political journey toward the November election along with 130 million-plus Americans that will likely cast votes.

I have long held to the belief that the political views and beliefs of any talking head (and that includes me!) should be of no interest to anyone nor should personal political views be a part of any market commentary.

I only discuss that voyage in my Diary as the election outcome relates to its possible impact on our capital markets. So, I will not inject my personal political beliefs.

Reviewing a Surprise in my 15 Surprises for 2016

Many were quite skeptical when I predicted in my 15 Surprises for 2016 back in December 2015 that Donald Trump likely would become the Republican Party's presidential nominee. As I wrote at the time:

Surprise No. 10: It's Hillary vs. The Donald

"The U.S. far left and far right both surge in popularity as voters lose faith in the political status quo. Despite his rude and crude campaign, a series of terrorist acts within U.S. borders propels Donald Trump ahead of all of his Republican competitors."

The first Clinton/Trump presidential debate attracts nearly 100 million viewers. Given the world's chaotic landscape, the November election is much closer than expected, but Clinton beats Trump 293 electoral votes to 245.

As her first initiative (even before her January inauguration), President-elect Clinton adopts a populist crusade that immediately attacks income and wealth inequality by recommending a large 'wealth tax' and an increase in the U.S. minimum wage."

--Doug's Daily Diary, 15 Surprises for 2016 (Dec. 29, 2015)

But then in June I reversed the surprise, writing in Another Surprise: 'The Trump Mutiny'that for the first time in history, a major party's presidential nominee (Donald Trump) would likely withdraw in the middle of the race. I made my prediction of a Trump withdrawal based on polling and funding woes (at that time) coupled with limited endorsements from Republican office holders and policy makers. I also believed that the Trump campaign could fail owing to its then relatively shallow campaign organization and support team. I was wrong as the presidential race is now a toss-up.

Back in June, Secretary Clinton had a lead of approximately eight percentage points over Donald Trump. According to London betting parlor Paddy Power, Clinton's odds today are 8-15 (they were 3-10 in June) and Trump's odds today are 17-10 (they were 7-2 in June).

It is now clear that the odds of the "possible improbable" of an early Trump withdrawal was wrong-footed as, in part, I underestimated the intensity and strength of Trump's core base and I underestimated the general mistrust regarding Clinton's transparency and honesty. I also underestimated the U.S. electorate's desire for change and rejection of the status quo and the loss of the key millennials' constituency support given to the former secretary of state.

This intense rejection of the status quo was the likely outgrowth of policy (monetary and other) decisions following The Great Decession of 2007-09 and intensified when the failure of Lehman Brothers led to the near-collapse of the world's financial system.

The schism between the haves and have nots was further rooted in a monetary regime that failed to "trickle down" and only "trickled up" over the last five to seven years. Those with large balance sheets -- principally in equities and real estate -- prospered, while those middle- and lower-class citizens suffered from stagnating wages and salaries at a time during which the cost of the necessities of life rose.

I initially discussed this inequality phenomenon in a Barron's article, "The Threat of Screwflation," which suggested that the root causes of the wealth and income division were principally globalization, advancements in technology that displaced many jobs, and the need in a slow-growth setting burdened by regulatory expenses for corporations to reduce fixed costs by making temporary employment a permanent feature of the marketplace.

The Trump core base has been material victims of this turn of screwflation; the vision that an individual's quality of life and standard of living might be worse in the future than in the past has contributed to an overwhelming reason for the surprising success of his campaign this year.

Why Either Outcome in November Is Bearish

The Base Case: My base case is that Clinton defeats Trump in a relatively close vote, as suggested in my 15 Surprises for 2016. I believe my initial electoral college projection of 293 (Clinton) to 245 (Trump) could be materially on target.

Yesterday, visiting my son and his family in Carroll Gardens, Brooklyn, I parked and looked up to see this possible omen in the street signs:

The Market's Possible Problem with Clinton

A Clinton victory wouldn't necessarily mean that the Democrats would control the federal government. After all, Republicans currently hold majorities in both the Senate and House, and I suspect they'll at least retain the House after November. To control both congressional chambers, the Democrats would need to pick up at least 30 House seats and five Senate seats if Trump wins the election or four if Clinton does (a Democratic vice president would break a 50-50 tie).

So, let's say that the Democrats take the Senate (in a Clinton win) and win more than 25 House seats but the GOP still retains control of the lower chamber. What does that mean going forward? Two words: More gridlock.

With the Federal Reserve losing its effectiveness, the scenario outlined above would mean that needed fiscal stimulus simply won't happen. Even though I believe many investors' baseline expectations call for it, there'd simply be too much gridlock and partisanship in Washington.

The Market's Possible Problem with Trump

The market faces different but continuing problems with a potential Republican win.

I presume a Trump victory will come with Senate and House Republican triumphs, leaving broad control of legislative initiatives within his party.

But, our financial markets abhor uncertainty and a Trump presidency holds numerous social, economic (currency, trade, etc.), federal debt, fiscal, tax and Federal Reserve policy ambiguities, as little detail, beyond broad generalizations, have yet to be spelled out.

Importantly, many of the most ambitious elements of Trump's general plans to catalyze economic growth could prove more expensive and less than practical. If imbalanced, even a Republican majority might render legislative passage difficult, as some in his party may not be on board with his directives.

On the road to "Making America Great Again," there likely would be more uncertainty associated with a Trump win than in any new presidency in history.

Bottom Line

Today's opening missive is a general discussion of how the markets might react to a Clinton or Trump victory. I am purposely not travelling deep into the weeds to discuss the specific policy views of the two candidates and the market's potential reaction to those details.

A Clinton presidency will likely produce fiscal (legislative) gridlock (Democratic control of the Senate and Republican control of the House) and inertia at a time in which monetary policy has lost its effectiveness. There will simply be too much animosity between the parties to assure compromise following such a heated campaign that has been filled with personal and party attacks on the part of both Republicans and Democrats.

A Trump presidency will likely produce a broad swath of uncertainty as it related to ambiguities and the absence of details of policy. As well, passage of Trump initiatives could prove too debt-heavy and hard to legislate, with opposition outside and even within the Republican Party.

From my perch, both outcomes are market-unfriendly, have not been priced into the markets, will produce additional uncertainties and ultimately might lead to a contraction in valuations.

 

 

Doug Kass is president of Seabreeze Partners Management Inc. This essay originally appeared at TheStreet.com.  

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