We’re all exhausted from the Presidential election campaign. Markets have been trending down for six weeks and uncertainty is further draining investor enthusiasm. Until now, I have intentionally avoided writing about election outcomes and stock market effects. This year’s unprecedented divisiveness has caused me to consider potential outcomes.
As of Monday evening (November 7th), here are 4 potential outcomes, in order of probability:
Clinton wins: Most polls place a 70%+ chance of this outcome. Markets prefer the known to the unknown and will likely rally 3% to 5% if Clinton wins an undisputed victory. If Republicans maintain control of the House and Senate, all the better. Markets do best when power is shared, even though gridlock often ensues. A Paul Ryan-led House would make big policy swings unlikely, further supporting the stability case.
Clinton wins BUT continues to be investigated for her alleged crimes: This outcome will potentially lead to an even longer paralysis than an uncertain election outcome. The investigation against Clinton and the Clinton Foundation is extensive. If we look back, the Watergate scandal took 19 months to be resolved and Nixon was forced from office for obstruction of justice, not the original crime of burglary. In the case of Clinton there is a lot of evidence to be brought before the public, and it will likely get to the public, whether through official channels or unofficial leaks. If in fact Clinton continues to be under investigation, her administration will likely have a hard time governing effectively.
Trump wins: Trump is anti-establishment and his presidency would bring a host of policy unknowns. It is in his best interest to have everything (the country, the markets, etc.) in pretty bad shape before he takes office so that he can enact his own policies. Trump has mentioned that he thinks the stock and bond markets are in bubbles so he may seek to pop that bubble. In addition, if trade balances are at the top of his concerns he is likely to seek ways to lower the dollar. There is also potential for the current administration to do what they can before leaving office in order to make his job of changing policies harder.
A close election with fears of voting irregularities/inaccuracies/fraud: An election without a clear winner will likely cause both political and economic paralysis. There are already strong divisions between people and political parties. Many surveys suggest voters no longer trust that the government is going to do the right thing. If there is a question of voter fraud, it will be hard to find a clear solution that will appease the losing party.
Historically, the US stock market has done well in the week leading up to Election Day, and then weakened in the week following, by an average of -1% since 1928. Markets are likely to be volatile unless Clinton wins a hands-down victory. The sooner that the market can return to normalcy, the better. Elections are dangerous events on which to make short-term market bets.
Although the Presidential election has weighed heavily on investors’ minds, economic data has quietly firmed. Third quarter profit growth for the S&P 500 is on track to post its first positive quarter since late 2014. The job market continues to improve with the strongest wage growth since June 2009. Global Manufacturing PMI reached its highest level since October 2014, suggesting that the global economy is picking up steam. Once markets have an opportunity to digest the outcome of the election, firming economic fundamentals should once again be back in the driver’s seat.
However hopeful I am that we will see a clear resolution on Tuesday, we must also invest in light of the truth that no one knows the future and political divisiveness is at historic highs. Our worst case scenario is that political uncertainty continues and potentially spills over into economic uncertainty- even past Tuesday’s verdict. If the political uncertainty causes consumers and companies to reduce spending and investing, the US economy could slow. This would be a self-inflicted wound.
Given the range of outcomes for this election, investing based on who may win or lose seems to be a deeply flawed strategy. Until political uncertainty fades and economic fundamentals reassert themselves, caution is warranted--if not demanded.
