First things first. As we head into the final leg of the 2016 U.S. general election that has seen vitriol and tangential issues (personality and peccadillos) elevated to what were previously unimaginable levels, we repeat our previous admonition: THERE IS ABSOLUTELY NO INCENTIVE TO HOLD ANY INTERMEDIATE-TERM MARKET POSITIONS INTO THE U.S. ELECTION THIS TUESDAY.
It has tightened to the point where nobody really knows what will occur any more than they knew the outcome of the UK Brexit vote back in June. In fact, the U.S. political landscape will not only be shaped by the decision on the future President of the United States. It will also depend heavily on the results of the down ticket races, especially whether the Republicans retain control of the U.S. Senate. (It is far less likely they will lose control of the House of Representatives.)
The post-election ‘dipsy-doodle’
As it is American slang, we begin with the definition of Dipsy-Doodle: it is both a sharp physical shift by an American football ball-carrier to avoid being tackled, and more generally taking a zig-zag path. The first definition might aptly describe the moves of both U.S. Presidential candidates in their responses to their scandals. Yet the latter is the applicable view on what might well occur in the immediate wake of the election and then the intermediate term economic and market results.
As we have noted in previous comments, the pundits could have the dire economic and equity market results of an unexpected Donald Trump victory as wrong for the intermediate-term as they had the horrible predictions for the UK LEAVE vote back on June 23. The same goes for a Hillary Clinton victory being very good based purely on continuity of the current, still struggling economic situation, yet negative in the intermediate-term.
It is hard to imagine how the intermediate term fortunes of the U.S. and global economies and equities are going to be worsened by a candidate proposing lower corporate taxes and regulatory reductions (Trump) versus the one (Clinton) who is promising just the opposite.
So here we have a political process in the United States where the lack of informed citizens in what has become an almost apolitical culture has led to an untenable choice. It is either an unacceptably egotistical and over-confident candidate that doesn’t understand how the Federal Reserve works, yet has the right plan for incentivizing business to reinvigorate the U.S. economy. Or a more electable and ‘predictable’ candidate who comes with tons of incompetence (based on previous failures) and a sense of entitlement and corrupt practices, who also has exactly the wrong prescription for invigorating the U.S. economy.
This is not just a weak point on the economy not improving. As Mohamed El-Erian has noted a recent Financial Times opinion that there is less chance for a "steady as she goes" still weak U.S. economy due to the degree to which the ‘new normal’ is now unacceptable to a major portion of the U.S. working age population. Either the political ramifications of continued weakness, or the potential for a U.S. annualized GDP that has weakened to little more than 1.0% slipping into a recession will bring about more pressure on the global economy.
That is the economic background if the more predictable candidate ends up being the comfortable choice that still leads to further economic weakness. The lack of any likelihood the Fed will challenge the political class (like the ECB’s Mario Draghi) to deliver the essential structural reform complement to monetary policy if it has not done so already is the other side of the equation that reinforces a negative overall perspective.
This is not a vision of a repressive totalitarian situation in the United States, even if many on the Right are concerned about expanding government insertion into many aspects of business and life. Yet, it is a dual dystopian vision of a highly divided partisan government that refuses that refuses to take essential actions to improve the economy on behalf of its citizens. If that continues, it might lead to more control over the previously independent central bank that has been required to take more responsibility for the economy, which it is not equipped to fully assist.
Consider this in light of the potential societal and political disruption which might ensue, compared to what was always the case when even previously divided Congresses found a way to implement essential reforms in previous cycles. The United States could easily become a society that is even more divided than at present. That would mean further inability to lead global free market democracies, and its further devolution into the politics of envy.
The market bottom line
In the intermediate-term future view a Clinton victory will likely bring an equities relief rally that will assist the U.S. dollar and weigh on the govvies. That will be due to a perceived steady path to further growth. Yet, if she follows through on her higher taxation and regulation promises to the Left, at some point it will be likely that the U.S. economy and equities (and U.S. dollar) will suffer and the govvies will take heart once again from that economic weakness.
On the other hand, in the near term the received wisdom on the nervousness if Trump prevails will likely be actualized in an equities and U.S. dollar selloff (and govvies strength) right after the election. However, if Trump’s worst instincts and positions on things like trade agreements and undocumented immigrant deportation are seen to be countered by cooler Republican Party heads, then what will remain is tax cuts and regulatory clawbacks and some constructive change to the quickly turning disastrous Affordable Care Act.
Trump political reality
The truth that even he and his most aggressive Right wing acolytes will not admit is that it is not within the power of the President to cancel trade agreements. Any changes will need to be ratified by Congress. Any summary actions a President Trump would attempt through something like the Obama administration’s ‘executive order’ abuse would just a likely be deemed unconstitutional by the Supreme Court (which has slapped down President Obama on many, many occasions).
The ultimate dipsy-doodle
Therefore, a Trump election victory might indeed still cause a very sharp further selloff in equities and the U.S. dollar (along with the countervailing bid in the govvies.) However, once the dust settles it will be likely that more moderate trade and immigration policies than he has espoused along with tax and regulatory reform might just be very much better for the U.S. economy than what Secretary Clinton is proposing. In which case her victory may bring a relief rally on Trump’s defeat, yet with no ability to sustain the equities bull market overall. We shall see.
Thank you for your interest.
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