Greg Valliere, a leading consultant on how federal policies affect markets and personal finances, shared his insights with a small group of investment advisers last week in Nashville. He called this election the nastiest election of our lifetime and provided forecasts of election scenarios. He did not mince words in his critique of either presidential candidate. Key insights follow.
- The economy actually is doing pretty well, but there is a disconnect between how well the economy is doing and the mood of many Americans. Unemployment may go down to 4.5 percent; it appears the economy can grow by 2.5 percent in the second half. The Federal Reserve is in no rush to raise rates in the absence of inflation, although another move could come in December. The consumer is seeing a surge in disposable income—gas prices are low; wage increases are happening, and the stock market is reaching new highs.
- It’s premature to anoint Clinton, although she is the favorite. It would be folly to under-estimate Trump, despite recent polling, because Trump is consistently underestimated. He has an “outside chance” to pull off an upset now that he has better professional handlers and some issues can yet break for him, such as free trade and rising Obamacare premiums. Valliere doesn’t pay too much attention to polls, except the one at realclearpolitics.com. They have a great website and every day in the upper right hand corner, present a conglomeration of all the polls. http://www.realclearpolitics.com/.
- The main reason why Trump has a chance is that his opponent is so deeply flawed. By a 2-1 margin the public doesn’t trust her. Her negatives are in the mid-50 range. Ongoing scandals and controversies dog her, such as the Clinton Foundation and the ongoing email saga. The Bernie Sanders campaign inflicted damage on her, so she now is regarded as the “candidate of Goldman Sachs.” Finally, her husband Bill is both a blessing and a curse.
- Valliere sees three election scenarios:
a. A Clinton win by 3-5 points is the first scenario. The House likely would stay Republican. The Senate might flip, but maybe it doesn’t. Valliere thinks this scenario—probably the most likely—is the one financial markets could live with the best.
b. A blowout Clinton victory—i.e., a 12-13 points win—is the second scenario. The Senate likely would flip, and the House majority would be reduced. Valliere thinks the markets would worry that you’d see Nancy Pelosi, or a figure like her in the House, and Chuck Schumer, who takes over for Harry Reid in the Senate. A Clinton-Pelosi-Schumer troika is combination that could unnerve markets.
c. A very narrow Donald Trump victory is the third scenario. A Trump victory would bring lots and lots of issues and lots and lots of uncertainty, and markets hate uncertainty. To be fair, Valliere identified one area where Trump could play a positive role—in tax reform—business and international tax reform. Four things the markets would worry about are:
1) A trade war with China. Trump has virtually promised a trade war with China. Valliere acknowledges the Chinese don’t play fair, citing several examples, but financial markets would be very concerned at the prospects of a trade war in early 2017 between the two biggest economies in the world. A trade war could be initiated without congressional approval, by identifying unfair subsidies and commencing retaliation.
2) Trump’s alliance with many people who want to dramatically change the Federal Reserve. If Trump aligns himself more with people who want to strip the Fed of some of its authority, that could set up a clash between a new president, and Janet Yellen, and markets would not like that either.
3) Trump does not seem to have a clue how he would pay for all the things he wants to do–more money for defense, for the VA, and of all his spending proposals, a mammoth tax cut.
4) His rhetoric toward the markets creates uncertainty. He’s been quite critical of Wall Street, indicating he might want to really curb some Wall Street tax breaks and regulate Wall Street more aggressively in a way the creates some anxiety.
- A Clinton victory might mean that:
– We might see a continuation of governing by regulations and executive order, particularly if gridlock continues with divided government.
– We might see deployment of US troops abroad. She is seen as “pretty hawkish.”
– She most certainly will have the opportunity to appoint at least a couple of Supreme Court justices.
For further reading, several resources follow:
A recent interview with Valliere can be found here:
A transcript of a similar recent presentation can be found here:
Periodic updates of Valliere’s evolving analysis can be found here:
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