The Election and the Financial Markets

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Apr 13, 2016 3:53:38 PM

and tagged Commentary

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election and the financial marketsAlong with Puerto Rico, the other topic readers have been inquiring about is the presidential race and the effect on the markets. Yesterday, someone asked whether she should go to cash until the political uncertainty settles down. The short answer is no, but the question itself speaks to just how concerned people are about politics.

Let’s take a look at what the election could mean for the markets.

A long road to any major policy change

Investors are right to be paying attention—not because of a potential market collapse, but because the range of possible policy outcomes is beyond anything we’ve seen in decades. The presidential contenders include a democratic socialist, a hard-core conservative, and a candidate whose proposals range from the conventional to the radical. Any of them could be the next leader of the United States. When you combine this uncertainty with the possibility of a shake-up in Congress, the potential for policy disruption is real.

Of course, a number of things have to happen first. First, a candidate has to get his or her party's nomination. So worrying about, say, Sanders’s policy agenda probably isn’t worth it right now. Once nominated, the candidate has to formulate his or her message for the general election, which may or may not resemble what has been said during primary season. It’s likely that the policy proposals rolled out for the general election will be more moderate than those deployed during the primaries. And then, the candidate has to be elected.

That was the easy part; the hard part starts after the election, when the new president must get those policies enacted. In a divided Congress (the most probable outcome), the ability of any president, Democrat or Republican, to do anything radical is slim to none. Our government is designed to make it hard to push things through, especially unusual things, and recent polarization hasn’t made that any easier.

Let’s look at a recent example—the only recent example—of a radical proposal getting passed. The Affordable Care Act, aka Obamacare, was one of the biggest policy changes this century. Even with the Democrats controlling all branches of government, it almost failed. After it was passed, it was nearly killed in the Supreme Court. The fact that it passed says radical change is possible, but the circumstances of its passing show just how hard that can be. 

We’ll just have to wait and see . . .

Before I start worrying, I want to see the candidates and the policies they’re running on in the general election. That’s when I will start thinking about potential changes that might affect the financial markets, with tax changes currently at the forefront of that possible list. After the election, I will evaluate the winner’s policies in light of which parties control the House and the Senate, in an effort to determine whether those policies might end up passing.

In other words, I’ll start paying attention this summer and only really engage toward the end of the year. Right now, there’s a lot of smoke but very little light.

As I said, we need to keep an eye on the election—policies could be changing, and that could well affect the markets. But we’re not at the point where anything that happens in the campaign really means much on a long-term basis. I will certainly comment on the economic and market aspects of the election when there’s anything to talk about, but for right now, the only message is sit tight and wait to see how the race plays out.

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