Thursday, June 09, 2016

Confidently, Wall Street Predicts Little Impact From The Election


Aside from funding Hillary's White House run-- $44,470,414 career-long, not counting millions in bribes "for speeches"-- what's Wall Street saying about the election? My own banker sent me what investment bankers at his company are reading. Dan Schnur, a Wisconsin Republican consultant who moved to California and was "reborn" an independent-- and who ran unsuccessfully (9.2% of the vote) for Secretary of State in 2014, claims it isn't anger that's driven voters to Trump and Bernie, but fear.
In Schnur’s opinion, voters powering Donald Trump’s campaign into the spotlight are white, working-class, and middle-aged voters whose steady opportunities are no longer available. Twenty to 40 years ago, they were told that they did not need to go to college. With a high school diploma, a working-class American could enter into a trade or get a manufacturing job to earn a good living, buy a home, and retire with a pension. Millions of working-class citizens started down that path, but, over time, those professional opportunities disappeared, leaving this voter segment frightened for lack of future prospects.

On the Democratic Party side, supporters of Bernie Sanders have propelled much of the discussion that influences the Democratic Party platform. Many of his supporters are Millennials who are frightened because they graduated in the teeth of the recession, or in a recovering economy, and are let down by the job market. Sanders’ response to this group has been so strongly received by Democratic voters that Hillary Clinton has changed her so-called establishment stance on some issues-- including free trade, minimum wages, Wall Street reform, and college affordability.

...Schnur believes that from the perspective of the Silent and Baby Boom generations, the political system has worked, for the most part, over many years, and can eventually overcome the polarization that has deteriorated the Federal government’s ability to make and carry out laws effectively. Because their life spans are shorter, younger voters have an abbreviated exposure to politics and economics. They have only experienced the recent recession and the perceived inadequate economic recovery that followed.

The younger generations, particularly the Millennial generation, have not experienced a political environment where political opposites work together to accomplish a goal. These voters did not witness two political powerhouses like Tip O’Neill and Ronald Reagan unite to save Social Security or Newt Gingrich and Bill Clinton work toward a balanced budget. Instead, they see a government that does not function well and needs a radical overhaul.

As a result of this contempt for the current political system, the majority of Millennials are choosing to register as neither Republicans nor Democrats, but as Independents. In fact, there is an increase of registered Independent voters across all age groups. The irony of this shift is that, regardless of age, Independent voters are almost indistinguishable ideologically on the left or right spectrum from Democrats and Republicans. According to Schnur, “the one thing that sets apart many Independents is not that they are more conservative than Democrats or more liberal than Republicans, but that they are more hostile and suspicious of government and politics.”

Schur concludes happily that "Presidential elections are lightning rods for debate about how to improve U.S. job prospects and the economy. This election’s strong U.S. economic focus is consistent with the historically domestic concerns of voters in post-war eras like we are in today. The candidates in this election appeal to voters who feel their economic opportunities are stifled and are frightened for their futures. However, with history as a guide, we can expect that when the chosen candidate reaches the White House, we will find a more moderate leader who looks to collaborate more within and outside of party lines."

In other words, don't worry... the system is so screwed up in knots that no change can happen. And then they got to "the important stuff," how to invest logically in an election year. To navigate an election year that includes Trump and Bernie, but where Wall Street is heavily invested in Hillary (and in conservatives of both parties for Congress), they rounded up David Wines, President and CEO of HighMark Capital Management, who doesn't feel that American politics drives the markets and recommends investors keep in mind that global economic factors have a greater influence on market performance, seemingly unaware that either Bernie or Trump, is likely to disrupt the corporate trade policies that currently run the show. Or maybe he's just so sure that ole status quo Hillary will be the nominee, that it isn't even mentioning. Politics is too emotional for bankers to factor into the equation.
Political tendencies are often based on very personal feelings and opinions about candidate views on important topics—from climate change and healthcare, to corporate taxes and education. While investors may be emotionally tied to the outcome of any election, they should not commit capital to feelings, but instead, make logical decisions based on current and forecasted market conditions. According to Wines, “investors need to recognize that politics can significantly drive emotions, but these emotions need to be set aside when making investment decisions.”

Wines is of the opinion that in reality, stock market performance in election years has less to do with the candidates than the economic backdrop behind the battle. The economy a newly elected president inherits, and the tools he or she has available to stimulate the economy generally influence market performance more than the president who is elected.

In analyzing the current conditions, Wines sees that U.S. and global economies are relatively weak despite low interest rates that traditionally fuel economic growth. He recommends we consider the following factors affecting the 2016 and 2017 markets and economy:
Fuel from the Federal Reserve’s current monetary policy is nearly exhausted. The goals of the U.S. Federal Reserve monetary policy are to promote maximum employment, stable prices, and moderate long-term interest rates; at this point, there is little opportunity to advance the economy through changes in monetary policy. Either candidate who becomes president will inherit this condition.

Corporate profits are healthy and expected to remain that way, but are not expected to go meaningfully higher over the near term due to modest global economic growth. We are in the later stages of a business cycle where we usually see pressure on corporate profits primarily as a result of levels of inflation pushed up by higher wage costs that erode corporate profitability. He does not expect a dramatic run-up of the S&P 500 between now and the end of the year and forecast modest growth in 2017.

Fiscals timulus for individuals, businesses, and states is unlikely if Congress and the president sit on opposite sides of the political party aisle. Changes to the tax code and fiscal policy that power growth require the president and Congress to work together. This is far easier to achieve when the new president represents the same party that controls Congress.
There is also a report on real estate from real estate consultant Arthur Margon, a moderate Democrat, who-- no surprise here-- doesn’t believe the outcome of the election will have a significant impact on the real estate market right away. Regardless of who is elected, he thinks rates will continue to stay low. However, he does think that each candidate will take a very different approach to Federal Reserve appointments, which could impact the speed at which rates are increased. 

Under Hillary Clinton, Margon thinks that there will be a continuation of the types of appointments to the Federal Reserve we’ve seen over the past 8 to 10 years, which are largely academic economists. These economists do not have experience running a business, have never dealt with a business’ balance sheet, and have not sat at a trading desk and experienced market fluctuations first hand. With Clinton he expects to see “lower for longer” when it comes to interest rate policy (a gradual increase in rates until inflation becomes an issue).

If Donald Trump is elected, Margon expects Trump will appoint business economists. These economists have run businesses and reported to people in business. He expects there would be a quicker movement to bring interest rates closer to the norm, which is around 4%. Margon does not believe this approach is better or worse than the current, more academic approach, but something that should be taken into consideration when forecasting.
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