I am rooting for gridlock in tomorrow’s election. The Founders of our great country designed a political system based on the principle of “checks and balances.” They had a realistic understanding of human nature and designed a system that would work best when it didn’t work to allow the will of the majority to infringe on the rights of the minority.
To get anything done, a reasonable amount of compromise and agreement would be necessary. In other words, the system worked best when it didn’t work to allow extremists to impose their policies on the rest of us even if there were more of them than of us. The result is often pejoratively called “gridlock,” but in fact it is the most desirable outcome more often than not. I don’t have any statistical proof, but my sense is that gridlock tends to be bullish for stocks more often than it is bearish.
Both of the leading presidential candidates are very flawed characters, to say the least. They are the two most unpopular presidential candidates possibly in all of American history. Many voters won’t be voting for their favorite candidate, but rather against the one they like the least. The race is increasingly looking like a tossup. Let’s hope the winner is gridlock.
Now let’s consider a few of the possible outcomes and the implications for the financial markets:
(1) HRC wins. If Hillary Clinton wins, it will likely be by a thin margin, especially if some of her less enthusiastic supporters decide to stay home on Election Day. Meanwhile, Donald Trump’s hardcore supporters are more likely to show up and vote for Republicans across the board to make sure that if HRC wins, she’ll be gridlocked by at least one of the houses of Congress. Even in the unlikely event that the Democrats win majorities in both houses, the Republicans will attack our new Madam President at every turn, and so will Trump TV.
(2) HRC is pardoned. There has been some chatter that President Barack Obama might pardon HRC before his term ends. Steve Soukup and Mark Melcher, our very good friends at The Political Forum, recently wrote: “Some people--including the Wall Street Journal’s Holman Jenkins--think that President Obama just might be foolish and reckless enough to pardon his successor preemptively, before he leaves office. Obama could do that, no question. But even if he did, even if he took that risk to his legacy, his actions would only solve the Clintons’ criminal legal woes. They wouldn’t stop--and would, in reality, likely encourage--Congressional investigations and actions, perhaps leading to impeachment of President Clinton. Again.” Furthermore, it would be very odd, to say the least, to pardon HRC if she hasn’t been charged with a crime, let alone convicted of one.
Yesterday, the NYT reported: “The F.B.I. informed Congress on Sunday that it has not changed its conclusions about Hillary Clinton’s use of a private email server as secretary of state, removing a dark cloud that has been hanging over her campaign two days before Election Day. James B. Comey, the F.B.I. director, said in a letter to members of Congress that ‘based on our review, we have not changed our conclusions that we expressed in July with respect to Secretary Clinton.’”
(3) DJT wins. If Trump wins, even his own party in Congress might refuse to cooperate with his administration. Many Republicans are part of the establishment that Trump has railed against. They view him as a rogue Independent who ran as a Republican and destroyed their party. Most of them don’t share his extremist views on deporting illegal immigrants and abrogating trade treaties. On the other hand, many of them probably would support lowering tax rates for individuals and for businesses. However, Trump’s economic program is likely to be resisted mightily by congressional Democrats, particularly if they manage to have a majority in one or both houses. Needless to say, they will push for a congressional investigation of some of Trump’s legally questionable activities. At the same time, Trump has declared that he will have his attorney general go after HRC, her husband, and their charitable organization.
(4) Infrastructure consensus. There seems to be a consensus in the investment community that no matter who wins, there will be enough bipartisan support to pass a huge infrastructure spending bill. Maybe. My hunch is that the next wave of gridlock will be so acrimonious that even this won’t happen. What if I am wrong, and Congress passes and the President signs a $1 trillion spending program (to pick a round number)?
Previously, I’ve been skeptical about whether the country is “shovel ready.” Despite all the promises that the American Recovery and Reinvestment Act of 2009 would include lots of infrastructure spending, public construction put in place has remained below its record high during March 2009 (Fig. 1). Projects take so long to get approved, and construction is so slow. There might not even be enough construction workers to handle all the new jobs (Fig. 2). Trump might have to bring them over the wall from Mexico. (His firm reportedly has employed workers, either directly or indirectly, who were or are illegal immigrants.)
Another possibility is that a fiscal spending program passes and actually stimulates the economy, which is already very close to full employment. The result might be a big increase in both wage and price inflation. That could trigger a debacle in the bond market. As bond prices plunge, we all would conclude that the bubble this time was in the bond market. The negative impact on the economy of soaring bond yields might offset much of the stimulus from fiscal spending. The Fed would have to tighten for a while in this scenario. Providing “helicopter money” to fund the fiscal program would be out of the question.
(5) Health care consensus. Another widespread consensus view in our business is that Hillary would be bad news for health care stocks, especially pharmaceuticals and bio-tech companies. She certainly was bad news when she pushed her “Hillarycare” legislation. That was a 1993 health care reform package devised by a task force headed by the First Lady and supported by her husband, President Bill Clinton. It was heavily opposed by conservatives, libertarians, and the health insurance industry, which produced a highly effective television ad, “Harry and Louise,” in an effort to rally public support against the plan. The plan was declared dead by Senate Majority Leader George J. Mitchell on September 26, 1994.
At that point, the health care stocks, which had been hard hit by the threat of Hillarycare, rebounded smartly (Fig. 3, Fig. 4, Fig. 5, and Fig. 6). They were hit again by the debate over Obamacare during 2009 and early 2010. The Affordable Care Act was enacted on March 23, 2010. Again, health care stocks revived, until they were hit in 2015 by the realization that Hillary might be back as President. Sure enough, these stocks swooned a few times as she mentioned during her campaign that drug prices might need to be controlled by the government. The stocks might rebound nicely if she loses tomorrow or if she wins but is gridlocked by the political system.
(6) Yellen’s future. If Clinton wins, Janet Yellen can look forward to serving her term as Fed chair until February 3, 2018, and then possibly getting reappointed for another four-year term. Fed Governor Lael Brainard, Yellen’s BFF, might be appointed to head up the US Treasury in the Clinton administration. In this scenario, the stock and bond markets can look forward to a very gradual normalization of monetary policy.
If Trump wins, Yellen might have to deal with a barrage of critical tweets from the Tweeter in Chief. He has already been critical of her, suggesting that interest rates should be higher. However, once he is President, he might tweet a different tune and welcome the Fed’s low-interest-rate policy, especially if he intends to ramp up fiscal spending.
(7) Warren’s future. In my meetings in Kansas City last week, I raised the possibility that Elizabeth Warren might be appointed by Clinton to run the SEC. That was a show-stopper in every meeting as my hosts’ jaws dropped. She would push to break up the banks, stop buybacks, and regulate everything in sight.
(8) The next recession. Recessions have a tendency to occur early during the first term of presidential administrations (Fig. 7). So do bear markets (Fig. 8). Whoever is elected President may succeed in passing a huge infrastructure spending plan that boosts economic growth and inflation (scenario #4 above). If the bond market blows up as everyone runs to the exit door at the same time, that might trigger a financial crisis and a recession. That’s not my forecast. I’m just thinking out loud.
If Trump wins and really starts a trade war, even attacking US companies that import goods they manufacture abroad, the consequence could be a recession.
Vote and pray for gridlock.
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
© 2022 Newsmax Finance. All rights reserved.