2016 Election

Monday 11/07/16

This week I am going to take a look at the overlap of presidential politics and the market. I have done a pretty good job avoiding politics in these posts and I intend to continue doing so after this week. I would like to preface this post with the disclosure that I do not support Clinton or Trump; I voted for Gary Johnson, so please leave a comment telling me why a vote for Johnson is actually a vote for Clinton or Trump depending on your political persuasion. I also intend to focus on economic policy rather than mudslinging.

     On Friday, the S&P 500 suffered it’s longest string of down days since 1980 (see figure 1), falling for nine consecutive days. This drop has been attributed to anxiety about a Trump victory. This theory gained further credence when FBI director James Comey cleared Clinton’s latest batch of emails from criminal wrongdoing leading to a massive rally in stock index futures (see figure 2). Most of the polls show Clinton with a solid lead over Donald Trump and I would be surprised if Clinton doesn’t win by a wide margin. Let’s take a look at why the market may be concerned with a Donald Trump presidency.

Trump

     Trump got a lot of attention for his plan to build a large wall between the United States and Mexico, but that isn’t the only wall he has suggested. Trump has consistently opposed free trade. He has proposed a 35% tariff on Mexico and a 45% tariff on China. I can’t imagine a scenario where this doesn’t lead to an immediate global recession. Tariffs like these would lead to higher prices for consumers, particularly low income consumers who benefit from lower priced products from other countries. Trump would likely find support from Republicans and Democrats to pass these measures.

     The worst part about tariffs is that they almost always lead to counter-tariffs. This will decrease global trade and many of the modern conveniences of globalization that are taken for granted would disappear. Even more concerning is that retaliatory tariffs have historically culminated in war. From the beginning of Trump’s campaign, this has always struck me as the most concerning issue.

Clinton

     Hillary Clinton’s position on free trade is less clear than Trump’s. She has supported free trade agreements in the past and called the Trans-Pacific Partnership (TPP) the gold standard in trade agreements. During the primaries, Bernie Sanders who has advocated protectionist policies similar to Trump’s pushed Clinton to change her stance on the TPP. I suspect that Clinton is hoping that the TPP is passed before she takes office so she can still get the TPP without losing political support from left-leaning democrats.

     The biggest complaint against Clinton in this election is corruption. So far there have only been accusations against Clinton, no charges. However, there have been many instances that have raised the eyebrows of both Democrats and Republicans. Clinton’s foundation has received numerous donations from autocrats who then seemed to receive special treatment from the State Department. She has also been criticized for her high priced speeches at investment banks which many view as a form of bribery. Corruption is a serious problem and over time will hurt economic growth, but it would be unlikely to cause an immediate recession in the same way that Trump’s trade policy would.

Johnson

     Johnson is a strong proponent of free trade and low taxes. Johnson has consistently said that he would use veto power to block any legislation that would increase the deficit. There is little doubt that he would do this since he accumulated more vetos when he was the Governor of New Mexico than all other governors combined. Johnson has advocated for a reduction in the size of government. Depending on the severity of his cuts he could trigger a recession by cutting government spending since it is a component of GDP, however cutting in the right way could boost growth in the private sector more than enough to offset the cuts.

     I hope that everyone will vote for the candidate who they believe will best lead this country. I fully endorse Governors Gary Johnson and Bill Weld because I believe they are incorruptible and best suited to handle long-term entitlement issues and the national debt. Realistically I am expecting a Clinton victory tomorrow.
Index Closing Price Last Week YTD
SPY (S&P 500 ETF) 208.55 -2.06% 6.13%
IWM (Russell 2000 ETF) 115.74 -2.06% 6.43%
QQQ (Nasdaq 100 ETF) 113.65 -3.3% 4.82%

Figure 1: Longest Losing Streak Since 1980

This shows the losing streak in the S&P 500.

Figure 2: Futures Rally

This chart shows the rally in S&P 500 index futures after FBI director Comey said that new emails were unlikely to change previous conclusions.