What would a Hillary Clinton or Donald Trump victory mean for financial markets?
These types of questions are always very difficult to answer, since political outcomes contain such a large degree of speculation. However, there are differences in policies that, depending on their success in implementation, could result in different U.S. economic outcomes. (Although there’s also the caveat that administration changes are often less dramatic and impactful than either hoped-for or dreaded beforehand.) This is not an endorsement in either political direction, and is limited to a discussion of current thinking in regard to policy regarding the economy and financial markets only, as opposed to policies in non-financial areas.
Firstly, as we’ve discussed in the past, markets crave certainty and prefer to avoid uncertainty. This is one reason why perceived continuity in administrations (such as Obama to Clinton) appears to be more of a ‘known’ unknown, particularly due to the well-publicized history and familiarity of Clinton’s public service and policy record. In some respects, markets find this preferable than those of a Trump, where a career that’s taken place fully outside the political arena leaves questions about how campaign ideas would translate to implementation. Normally, markets become more comfortable as poll numbers settle into a ‘likely’ outcome, but an abnormally high level of dissatisfaction with both candidates has made this an unusual election to say the least. A base case at this point appears to be a Clinton victory but continued divided executive/legislative branch, which could result in the ‘status quo’ of more deadlock and contention.
Democratic administrations have the reputations of not being favorites of Wall Street and big business due to platforms that are seen as being anti-business, higher-tax and stronger in regulation—in consumer protections, the environment and other areas. The severity of these views has waxed-and-waned depending on the era, but has become a higher-profile topic again in recent years (demonstrated by Bernie Sanders and Elizabeth Warren, as two examples) in the areas of consumer financial legislation, calls for increased financial regulation overall and even the breakup of the ‘too big to fail’ banks in the aftermath of the Great Recession. To no surprise, financial institutions have taken issue with this sentiment, so a centrist-type candidate like Clinton is seen as less problematic than a candidate with a further-left position, but remain skeptical nonetheless. Despite the familiarity with policy and tendencies, fears continue surrounding possible tax increases, a growing trend in raising the minimum wage, and a continued aggressive regulatory environment and the evolution of Obamacare.
The Republican side has traditionally been favored by the bulk of large and small business interests, due to a stance that favors wider degrees of business freedoms, lessened regulations, lower taxes, as well as what are seen as weaker environmental policies through pro-domestic oil/gas production. Interestingly, while several of the earlier mainstream candidates for the nomination exhibited classic/predictable Republican tendencies in these areas, one of the unique nuances surrounding Trump is an independent streak from the rest of the party in several policy issues—although the pro-business stance has been a lynchpin of his campaign, in keeping with his background. Assuming concerns over the ‘unknowns’ about Trump are assuaged, hopes remain that a pro-business administration could make headway in the areas of tax reform and over-regulation; the latter issue has been increasingly been acknowledged by not only business leaders but also well-regarded economists as a significant headwind to American productivity, innovation and growth.
The campaign discussion gets tricky when areas like foreign trade are involved. Most traditional economists agree that ‘free trade’ in its basic form is a good thing—meaning that nations able to specialize in certain goods or are able to produce them at a lower price for export, and, in turn, would import what is more expensive or more difficult to produce domestically. From a common sense standpoint, one can see the appeal, and free trade has played out decently in recent centuries as globalization has helped the world increase its overall wealth, as well as that of individual nations. However, it can be painful in the shorter-term for workers displaced by technological change and cheaper labor (outsourcing of manufacturing jobs to China has been a key scapegoat in this debate). Labor unions, including those in domestic manufacturing, have traditionally tended to steer towards the Democratic side, in an effort to minimize disruption and retain a current standard of living for workers, but union participation has been steadily shrinking for decades, dramatically dampening the force of this lobbying group. Contrary to some political claims, the multi-decade outsourcing of production has been going on to an increasing degree since the 1960’s, at least, so not one region or is necessarily the culprit and industries of all types have been affected. The populist movements seen not only in the U.S., but also in other developed areas (including in the U.K., where it was partially behind the success of Brexit), represent a backlash against this globalization trend in an effort to keep jobs at home. Despite promises by politicians to help, though, this trend has been very difficult to combat. Many economists would likely argue, ‘Why would you want to cut back on free trade?’ The answer of course, is very different for a family dependent on a job on the fringe of being outsourced. This results in nations making what could be called ‘sub-optimal’ economic choices, which is a far deeper topic.
There are other issues that remain a priority of both parties, including increased spending on education and infrastructure—neither of which is cheap, and could result in deeper deficits in the near-term if spending is ramped up. The U.S. has slipped in both of these areas as the rest of the world has caught up and/or surpassed us, so these remain valid long-term priorities. Contention continues, however, on funding. Thoughts are that policies of either administration will expand the federal budget, with it just being a matter of degree.
Read our Weekly Review for September 19, 2016.
Read the previous Question of the Week for September 6, 2016.