Monday night we had an opportunity to see the two presidential candidates face off, which heightens the debate over who will ultimately be elected in November. As we think about the outcome of both the Presidential and Congressional elections, we must think about the impact on markets and more specifically, those sectors that could be most affected.
Fortunately, the policy propositions of both candidates are very different and so their impact can be viewed individually. In the case of the Republican candidate, his policy statements on taxes, trade and spending are also very different from those of his own party. So determining the probability of his policies being implemented is more difficult. Still we can evaluate how the election may affect the economy and ultimately asset prices in a variety of different areas.
Let’s start with tax policy because who doesn’t love taxes! In the case of the Clinton tax policy statement, there is little change relative to the current code. The two important changes include a reduction in the estate tax exclusion from $5 million to $3.5 million and an increase in the tax rate for those making over $732,000 per year. It is estimated that these changes will raise approximately $100 billion per year in additional revenue or 2.8% more than the projected 2016 revenue. As a result the impact is nominal in relative terms.
Trump’s tax plan suggests a bit more of a radical change. The plan eliminates all but 3 tax brackets and provides a reduction in taxes for every tax payer. He would eliminate the estate tax and reduce the corporate tax from 35% to 15%. The estimated cost of these proposed cuts would be approximately $1 trillion per year. However, the economists working for the candidate suggest that the cuts will result in an increase in our annual economic growth rate of about 1.5%. The anticipated size of our economy this year is $18.558 trillion so a 1.5% increase would be about $278 billion per year.
This category is mostly about two issues. Both candidates agree on the need for infrastructure spending, although they differ as to the degree. This means an increase in road, bridge, and transportation hub spending. Because both candidates are calling for an increase in spending, and because Congress may be faced with an even slower economic growth rate when it returns in January, we are likely to see some increase here. Trump’s plan is to increase spending by $550 billion in the first year while Clinton’s number is closer to $275 billion. Either way the increase will be a benefit to those companies that provide the concrete, equipment and design work needed to improve the country’s infrastructure.
The election’s impact on the energy sector may be the most difficult to discern at this juncture. Clinton’s policy prescription is for an increase of $44 billion in alternative energy spending and a target of 33% energy production in renewables by 2027. Beneficiaries here would be those companies most focused on wind, solar and other alternative sources of energy. The traditional energy sources of gas, coal and oil would likely continue to face higher regulation which could increase the cost of production and distribution.
Trump’s energy policy is very different. He suggests the immediate elimination of all executive orders that President Obama has put through that have hampered the traditional energy industry. He would eliminate the current limits on the use of coal and work to open public lands to energy exploration. He would also eliminate all renewable energy spending on the part of the federal government in favor of private investment only. Traditional energy producers would be the bigger winners in this case, in particular the oil, gas and coal industries as regulation may reduce the cost of production and distribution. The policies that require Congressional approval would likely find that difficult. However, the elimination of executive orders could change the energy landscape.
Trump has made it very well known that the trade agreements currently in place, such as the North American Free Trade Agreement (NAFTA), and those being negotiated, like the Trans-Pacific Partnership Agreement (TPP), must be torn up and re-negotiated. During the convention he noted that trade would be “a signature feature of my presidency from the moment I take the oath of office.” Sectors of the economy and companies within them that are heavily reliant on trade may find themselves facing an increased cost — both at home as tariffs may be used to discourage trade — and in foreign countries as they raise tariffs on U.S. goods when faced with having to re-negotiate prior deals. This is relevant because the President has the power to levy certain types of tariffs and impose import quotas without Congressional approval. Of course, this could be a negotiating ploy on his part to bring countries like China to the bargaining table, but the process would be lengthy and likely hurt exporting companies in the near-term.
Clinton has suggested that she would keep NAFTA intact and has gone on record in full support of it. She too has suggested that she would employ a new trade prosecutor and triple the number of enforcement officers who would be instructed to be tougher on companies and countries who are not trading under the current set of laws. This could have a deleterious effect on trade but not likely as significant as Trump’s proposed policies.
Since Monday night, markets have reacted favorably to the debate with most polls suggesting a Clinton win. As a result the stock and bond markets rallied and gold sold off. The Mexican peso rose 2% on Tuesday. These market moves suggest that the outcome of the election will have a near-term impact on asset prices and it bears watching. We know that the poll spread between presidential candidates and in key Senate races will have an impact on markets.
Long-term, the pace of economic growth is what matters most to companies and investors. However, with growth so slow, the amount of leverage significant and the transition between generations driving the economy, this election may have a larger impact than most on markets.