The country seems split down the middle between Blue people and Red people.
However, more than half of Americans agree on one thing: Both presidential candidates are deplorable, if not outright despicable.
Hillary R. Clinton (HRC) has an issue with telling the truth. So does Donald J. Trump (DJT). Hillary has been working in the public domain almost all her adult life, while Donald has been in the private sector. So Hillary has a longer rap sheet than Donald, who seems to be working very hard to catch up with her. Hillary has insulted a wide swath of the population by calling them “deplorables.” Donald has insulted everyone else.
I am writing this before Monday night’s first debate of the two challenged candidates, where anything might have happened. I suppose the financial markets will provide us today with a preliminary vote based on what happened. The widespread view in the investment community seems to be that HRC would be better for stocks and bonds than DJT. Given the huge TV audience that was expected for the debate, Trump has already succeeded in transforming Washington into the biggest reality show of all times.
Consider the following:
(1) Status quo vs. “Quo vadis?” HRC represents the status quo, i.e., a third term of the Obama administration. The status quo has been bullish for both stocks and bonds. Hillary would increase spending on infrastructure and on entitlements. She would increase taxes on the wealthy. She would maintain our current trade treaties. She would likely reappoint Fed Chair Janet Yellen to a second term starting on February 4, 2018. She might appoint Fed Governor Lael Brainard to be Treasury Secretary. She would appoint more liberal Supreme Court justices. In other words, she would move the country further to the left. She might be relatively good for large money center banks and infrastructure construction companies, but not so good for pharmaceuticals.
DJT represents a change from the status quo, maybe even a radical one. Probably more than half of Americans would like to see a meaningful change in Washington, they just are uncertain about how radical DJT might actually be. It’s not obvious that most Americans believe that renegotiating our trade treaties, sending illegal aliens back home, and building a wall along the Rio Grande River will have any impact on improving their lives. On the other hand, Trump’s economic plan would benefit lots of folks by providing tax cuts, fewer regulations, and child care tax credits. Conservatives clearly would prefer his choices for the Supreme Court. However, they aren’t as comfortable with his isolationism and his bromance with Vladimir Putin.
(2) Reaganomics vs. Hillarycare. I reviewed Trump’s 9/15 speech about his economic plan in the 9/19 Morning Briefing. My analysis was titled “Stocks: Who Is the Least Deplorable?” Here was my conclusion:
“This plan seems too good to be true. For starters, Trump has to stay with the script, which is not his style. Congress gets the final say on his proposals for cutting taxes and capping deductions and loopholes. Trump certainly won’t get any cooperation from Democrats, and even Republicans may resist his pushy and politically incorrect style. His tough measures on trade could backfire if they lead to a proliferation of protectionism. Ironically, we may need construction workers from Mexico to rebuild our infrastructure, including the wall to keep them out.
“In any case, Trump certainly laid out a more sweeping and specific economic plan than anything presented by Clinton so far. While the status quo has been bullish under Obama, it won’t necessarily be so under Clinton. The bottom line is that stock investors might conclude that a reprise of Reaganomics might be better than four more years of Obamanomics, i.e., higher taxes, more regulation, and large budget deficits.”
Of course, we will never know for sure whether the losing candidate might have been better or worse for stocks. Would John McCain or Mitt Romney have been more bullish for stocks than Barack Obama? Obama famously said on March 3, 2009: “Profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it.” What a great call!
(3) Who’s on first? Using monthly data, the S&P 500 is up 140.3% so far since Obama moved into the White House on January 20, 2009 (Fig. 1). Looking at Blue and Red administrations since FDR/Truman, we can see that this gain is the fourth best (so far): FDR/Truman (285.6%), Reagan/Bush I (220.9), Clinton (203.0), Obama (140.3), Eisenhower (118.7), Kennedy/Johnson (78.7), Carter (26.3), Nixon/Ford (3.5), and Bush II (-31.6). Our data for the S&P 500 forward P/E starting in 1979 show that it rose sharply under Reagan, Clinton, and Obama (Fig. 2).
(4) Chair of the Board. Then again, perhaps it’s not all about who is in the White House. The chair of the Federal Reserve Board is probably more important to the economy and the stock market than is the President of the United States. We all know that stocks do best when monetary policy is easy and worst when it is tight (Fig. 3). The S&P 500 forward P/E tends to rise during periods of easy money and to fall when the Fed is raising the federal funds rate (Fig. 4).
Among the most bullish Fed chairs from the start through the end of their terms were William M. Martin (297.3%), Alan Greenspan (290.3), and Paul Volcker (220.4) (Fig. 5). The worst were Arthur Burns (5.0) and G. William Miller (19.4). Ben Bernanke (39.3) paid a heavy price in the rankings when the financial crisis hit early on his watch. We can still give him most of the credit for the 216.8% bull market that started during March 2009. The same basic story applies to the S&P 500 P/E (Fig. 6).
(5) Trump to Yellen: “You’re fired.” I’ve uncovered a YouTube video of Donald Trump practicing his first meeting with Fed Chair Janet Yellen if he wins the White House. He will treat her deplorably. He might ask her to pack up even before her term expires. She might resist, at which point she will have to stand up to his withering attacks. They’ve started already.
Trump, in a CNBC interview earlier this month, said that Yellen is “keeping [rates] artificially low” to help the Obama administration and, by extension, his Democratic opponent Hillary Clinton. Trump has even called into question the very statistics, like the unemployment rate, that the Fed uses to gauge the strength of the economy. Earlier this year, Trump told Fortune that Yellen had been doing a “serviceable job” but that he probably would not reappoint her if he becomes President.
I’ve often depicted Yellen as the “Fairy Godmother of the Bull Market.” So it’s possible that the market might react adversely to a Trump victory last night and on November 8. No one likes to see their godmother get beat up by a bully.
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.
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