At the same time, financial markets seem surprisingly indifferent to the outcome of the nominating process between the two political parties in the U.S. To the abhorrence of most “establishment” Republicans, Donald Trump appears to be moving closer to the nomination, while Hillary Clinton looks to have a solid, if somewhat tenuous, lead over her democratic-socialist challenger, Bernie Sanders.
Is it too early to worry about the impact of a Trump or Clinton presidency, or the chaos that might result from a brokered Republican convention? As the process approaches its final stages, we believe investors will soon turn their attention to the policy positions of the front-runners. Getting ahead of this thinking may prove beneficial in positioning portfolios for the future.
Let’s first consider Trump. Although he remains the clear front-runner for the Republican nomination, his victory is not yet assured. He also loses most polls in a head-to-head matchup with Clinton. Nonetheless, he should not be underestimated as the Republican candidate in the general election. Most of Trump’s policies are considered quite market-unfriendly. Among his major themes, he talks about imposing large tariffs on imported goods, a protectionist stance that is likely to raise costs for consumers and inspire a trade war with other trading partners. He also advocates cutting taxes by close to $12 trillion over the next decade, but independent studies have concluded that his plan could expand the federal deficit by more than $10 trillion. Add to that his lack of experience in the political arena and his penchant for unpredictability, and you have a recipe for very nervous financial markets. Should he choose a more mainstream running mate and an experienced Cabinet, markets may be more forgiving.
Hillary Clinton is clearly viewed as more market-friendly. While she has made disparaging comments about alleged price gouging in the pharmaceutical industry, her lengthy experience in the political sphere makes her much more of a known quantity. She may be able to negotiate deals with Republican leaders in Congress more effectively than Trump (who is generally loathed by both parties in the legislature). As a Democrat, she may be less eager to rein in growing entitlement costs (a market negative), but Trump has also not shown any interest in addressing that future threat to the federal budget.
Among the other candidates, Cruz has unveiled aggressive tax reform proposals that rely more on taxing consumption rather than income. His plan relies on a large increase in GDP growth to avoid exploding the budget deficit, but many tax experts are skeptical of this forecast. Kasich’s plan would reform the current structure by lowering tax rates for both individuals and consumers, which is viewed by most experts as a more traditional Republican approach. As far as a Sanders presidency’s impact on the market, the proper term might be “fuhgeddaboutit.”
While no one should pick a candidate solely on the basis of their impact on financial markets, it seems that Hillary Clinton would probably do the least damage. Markets should pay attention.
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