The Independent Market Observer

The Presidential Race: Uncertainty Left and Right

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on May 5, 2016 12:48:47 PM

and tagged Politics and the Economy

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presidential raceThe Indiana primaries giveth, and the Indiana primaries taketh away.

On the one hand, after Donald Trump’s victory there pushed both Ted Cruz and John Kasich out of the race, we now know who the Republican nominee will almost certainly be. On the other hand, Bernie Sanders’s victory extends the Democrats’ primary process further. Although Hillary Clinton remains the overwhelming favorite, that race isn’t over yet.

 From an economic and investing perspective, the problem is that both of these results increase potential policy uncertainty. And the markets really don’t like uncertainty.

Trump proposes major shifts

As I’ve written before, we shouldn’t worry too much about what candidates say during the primaries. But once we have a nominee and start to approach the general election, it pays to listen a little closer. Based on recent interviews with Trump, the New York Times reports that “by the end of his first 100 days as the nation’s 45th leader, the wall with Mexico would be designed, the immigration ban on Muslims would be in place, the audit of the Federal Reserve would be underway, and plans to repeal the Affordable Care Act would be in motion.”

That plan would amount to a radical reshaping of foreign policy, energy policy, monetary policy, and about a sixth of the U.S. economy in the form of the health care sector. Essentially, Trump would unleash more change in the first 100 days than we typically see in an entire administration.

Whether you agree with Trump’s ideas or not, they raise questions that would rattle not only the U.S. economy but the world economy. How would Mexico and Saudi Arabia react? Would the Fed be able to keep managing interest rates? Would millions of people lose access to health care? The more that policy uncertainty grows, the more worried markets will get.

Clinton leans further left

Meanwhile, on the Democratic side, Clinton is as close to a known quantity as you get in politics. Yet, after decades in public life, the need to appeal to Sanders voters has pulled her more to the left. Given the real prospect that Sanders could continue to the convention, markets can reasonably wonder just how far to the left Clinton might need to move to keep everyone on board.

On both sides of the race, then, there is more policy uncertainty than we’ve seen in decades, and as the election nears, it only seems to be mounting. Markets have pulled back over the past several days, and though there are always multiple reasons for that, the state of the presidential race may well be one of them. For the first time in many years, we really don’t know what the policies of the major-party candidates will look like, and changes in multiple areas are possible.

In any event, it’s time to start paying attention, as the markets will be listening to every policy pronouncement. Up to this point, what Trump and Clinton have said has been less immediately relevant, but the stakes are higher now. Expect more market reactions.

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