Greg Valliere Addresses Economy, Elections and Investments– August 19, 2016 by Randy Myeroff

We were honored to have Greg Valliere, renowned political strategist with nearly 40 years of experience following Washington issues for institutional and retail investors, address clients of Cohen & Company and Sequoia Financial Group recently. A regular guest on media outlets such as CNBC, Fox Business Network and CNN, and actively quoted in the nation’s financial press, Greg is always insightful when it comes to giving his view of the economy, political landscape and the resulting impact on the markets. Below are a few of the highlights he shared with the group.

Even though economic angst is still present among many Americans, Greg feels the economy is actually doing fine. With the recession ending over seven years ago, inflation is low, the Federal Reserve Bank doesn’t seem to be raising interest rates for a while yet and the Gross Domestic Product (GDP) is good. Unemployment is still going down, and, most importantly, disposable income is going up. Investors should feel confident in these fundamentals, and we should continue to see moderate growth of 2.5 % for the next few quarters.

But the big question on everyone’s mind is:  What about after the election and into 2017 (and beyond)?

The Presidential Election:  Who Could Win (and How)

There are three likely scenarios to consider.

Scenario #1 (currently the most likely) – Hillary Clinton wins modestly (by 4-6 points). The House would likely remain under Republican control and maybe even the Senate. The markets love a divided government, so this result would be a positive from an investment perspective.

Scenario #2 – Clinton wins by a landslide (by 14-15 points). The Senate would likely flip to Democratic control, and the House could flip as well. One party in charge is generally not viewed positively in the markets. If, as early as October, the sense is that Clinton is going to win by a landslide, the markets may respond negatively.

Scenario #3 – Donald Trump wins the Electoral College. Currently there is a very narrow path for him to do it, but events and issues (terrorist attacks, free trade deals, healthcare premiums that are expected to rise in the fall) could help him connect with voters and take a narrow victory. The other significant factor that could contribute to a Trump win is the seeming lack of trust voters have in Clinton.

Two things, however, are certain:  the winner will need to be a favorite among key demographic groups, such as Hispanics, African Americans and women; and the winner must be able to win on the Electoral College map. Clinton has the lead now, but it’s not a done deal.

What Could Happen

Markets don’t like uncertainty, and Trump would bring a lot of it to the presidency. If he wins, the market would be especially concerned about four things. Trump has:

1. Virtually promised to begin a trade war with China. A trade war in early 2017 would not be reassuring to markets.

2. Shown allegiance with Republicans who want to dramatically curb the authority of the Federal Reserve Bank.

3. Vowed to build the now infamous “wall,” spend more on defense, and implement a tax cut over the next 10 years that would cost $3 to $4 trillion. He says all these things will be paid for by cleaning up waste, fraud and abuse in the government (generally not a good sign of a solid plan).

4. Wild ideas on regulating Wall Street, particularly when it comes to investment banks and ending the carried interest tax break.

The one area Trump could play a constructive role is an area we truly need — tax reform. With other key politicians on board, including Clinton, the stars should be in alignment in 2017 for at least business tax reform. We could be looking at mid- to high-20s for business tax rates. International tax reform should take center stage as well in an effort to reduce the number of corporate inversions. But repatriation — bringing profits back to the U.S. from American companies operating overseas — will be THE international tax issue next year to make it all happen.

If Clinton wins, there will likely be more governing by regulation, as in the Obama administration. Issues such as regulating drug prices and committing more U.S. forces abroad will happen likely by executive order, since it will be hard to pass these through Congress. Enhancing defense spending would likely have a positive effect on defense stocks.

Regardless of who sits in the Oval Office, Greg believes the fundamentals for the next several quarters in the market should remain positive, and even the next two to three years should look good from an economic perspective. But — since by 2026 our country’s net borrowing costs will exceed all domestic spending — as a nation we will need to be having some tough conversations sooner rather than later. 

 

Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.