The upcoming U.S. Presidential election has led many investors to ponder what, if any, effect the result will have on financial markets and whether or not one should be “doing anything” in advance of the vote. While the election result certainly can have financial market implications, it is largely dependent upon such factors as market expectation and positioning, the general policy framework of each candidate, and who ends up controlling the House and Senate.
Let’s begin with positioning. From Wall Street’s perspective, Hillary Clinton, because of her years of public service, is considered to be more of a known commodity than Donald Trump. Mr. Trump has attempted to run as a non-establishment candidate, challenging many of the conventional tactics of politics, and this has caused some large institutional investors to be concerned about a Trump Presidency due to their inability to determine how he would govern. In addition, with only a few days to go before Election Day, the most recent polling data indicates Mrs. Clinton has the easier path to victory. Therefore on balance, most, but not all, market participants are expecting a Clinton victory and are positioned for such an outcome.
Turning to the general economic policy differences between the two candidates, Mr. Trump favors lower individual and corporate tax rates than Mrs. Clinton. While this may be a short-term net positive to the economy, the longer-term effect of such a large rate reduction is debated intensely, as some argue Mr. Trump’s lower tax rates would increase the deficit substantially. Mr. Trump also generally favors less federal regulation than Mrs. Clinton, especially as it relates to the energy industry. Both candidates support a fiscal stimulus plan to repair and restore the aging U.S. infrastructure. Mrs. Clinton’s plan calls for spending $275 billion dollars while Mr. Trump is calling for a $500 billion stimulus plan.
Incoming presidents always have a platform of proposals they wish to enact. The success or failure to do so largely depends on the composition of the House and Senate. If Mrs. Clinton wins the Presidency and the Republicans maintain control of both houses of Congress, we will likely see gridlock in Washington on many key issues. If the House and Senate are split, expect to see more movement in the implementation of Mrs. Clinton’s agenda.
In conclusion, due solely to market expectations and positioning, a Trump win would likely increase the probability for short-term market volatility, as investors adjust their thinking and positioning for what a Trump Presidency might mean. If Hillary wins and Republicans maintain control of both the House and Senate, markets may behave in a tame manner, at least initially, as the status quo of gridlock is maintained. But regardless of who wins, a portfolio should not be constructed for the next upcoming election. That is speculating, not investing. There is nothing to “be done” if you already have a properly diversified portfolio designed to deliver the returns you need over the longer-term. Leave the short-term noise of the election to the professional pundits and take that time to enjoy the beautiful colors of the fall season.