The old Macy’s at Cupertino’s mostly dead Vallco mall, on its last day of existence—the subject of one of many key ballot measures nationwide Tuesday. Photo by Elisabeth Dellinger.
As always, our political commentary is non-partisan and non-ideological by design, and we analyze politics solely for potential market impact. We favor no party, candidate or ballot initiative, and we believe political bias invites investing errors.
So a real estate developer-turned-reality TV showman with weird hair, a loud mouth and a penchant for 3 AM tweeting will be America’s next President. Some, including many in the investing class, fear this spells societal and economic doom, a dark age where globalization reverses and America turns inward. Others are more optimistic, hoping the bizarritude and rhetoric were only a front; that real and metaphorical walls won’t rise; that a divided electorate will knit back together and international treaties will stay in force—while taxes and regulations take a more business-friendly turn. Yes, investors have all manner of opinions about President-elect Trump, both good and bad. This column isn’t about any of that. Stocks don’t do personalities or sociology. Rather, it’s about this simple fact: Whatever your opinion of the man and his platform, he alone isn’t likely to have much influence on America’s economy. Presidents have limited power, which is why they always scrap big campaign pledges. Plus, America has a decentralized government. Taxes aside, most of the policies that impact everyday commerce (and probably your life) are state and local measures, not federal. Markets do care about presidential politics, but they aren’t the be-all, end-all.
Despite an 18-month campaign, we really don’t know much about Donald Trump’s actual policies. Like all candidates, his economic rhetoric changed like the (political) wind. One week he said he’d cut the federal debt significantly. Later on, he advocated a debt-funded infrastructure spending binge. First he was going to end NAFTA, then “renegotiate” became the key verb. All politicians do this, to an extent. During the campaign, we find out what they believe they must say to be elected. Once in office, we slowly discover what they’re really all about. The next eight months or so will be all about that discovery.
But let’s be realistic. This is a president whose party has a four-seat Senate majority—not enough to overcome a filibuster. Plus, several lawmakers in his party publicly repudiated him on the campaign trail, suggesting he will have to deal with opposition on both sides of the aisle. Some presidents can overcome that, if they won a huge popular mandate. But our next president won just 47% or so of the popular vote, less than his opponent. That isn’t a mandate. It is a tenuous hold.
So, the key question: Where are the potential areas of broad economic compromise between Trump and an oppositional Congress? I suspect they are few and far between. Taxes? We’ve been hearing about “grand bargains” for years, and they didn’t happen. Even when Congress was less divided than it is today. Dodd-Frank repeal or rewrite? Good luck getting that through a filibuster. Sweeping health care reform? Considering the angst over rising insurance premiums on both sides of the aisle, perhaps we get a patch to help ease consumers’ pain. But a wholesale repeal and replace of the Affordable Care Act also seems unlikely to overcome a filibuster. All might agree the law needs changing, but there are fundamental differences over what those changes should look like, and a lot of it comes down to “more government” versus “less government.” Those are not typically areas where compromise comes easily. And as for a certain wall, we live in a world where San Jose, CA is suing neighboring Santa Clara over a planned megamall. If two cities can’t even agree on a retail complex, what is the likelihood multiple states and dozens of counties and cities agree on what would perhaps be the most massive construction project in US history? This would be permitting hell, friends. See California’s infamous high-speed rail project with any further questions.
And with that, we’ve basically reached the limit of the president’s direct economic influence.[i] Sure, he could direct regulatory agencies to rip up recent rules and executive actions, like the Department of Labor’s fiduciary rule for investment professionals working with retirement accounts and the Treasury’s attempts to reinterpret the tax code to discourage certain mergers. Net neutrality might also be in the crosshairs. But these are industry-specific items that have always had a negligible impact on total output in our gigantic, diverse economy. To many Americans, they are an academic curiosity, nothing more.
Most other policy that impacts day-to-day life and commerce happens at the local level—state assemblies, town councils, and state or local ballot initiatives. States are usually the lab test for eventual federal laws, as we’ve seen historically with several sociological issues (and are witnessing now with legalization of a certain leafy green plant). Minimum wage, sales tax, rent control, housing, local roads and bridges, public transportation, zoning and many more are state, county or city-specific. For me, a Silicon Valley resident living in a 40-year-old apartment the size of a postage stamp, the most important races on Tuesday weren’t Trump vs. Clinton, Kamala Harris’s battle with Loretta Sanchez for the junior senate seat, or even the 19th House district. Nope, they were my town council, a couple statewide ballot propositions, one county measure and two initiatives in a neighboring city. Would my fellow residents vote for councilors who would approve more housing? Would Californians say yes to prescription drug price controls? Would the good people of Santa Clara County decide to hike our sales taxes in order to (maybe) expand public transit, paint more bike lanes and fix potholes? Would Cupertino voters effectively ban all new high-density real estate construction? Would they let a local developer turn a dead mall into a mixed-use wonder with public trails and 800 housing units? (The answers, in order: Yes, no, yes, no, no.)
Voters nationwide got to weigh in on similarly important local measures. Oregon voters soundly rejected an attempt to tax business sales in the state over $25 million. In South Dakota, voters decided not to cut the minimum wage for non-tipped workers under 18—a measure that tried to create more opportunities for youth employment by making it easier for businesses to hire minors.[ii] Colorado voters rejected single-payer health care. Oklahoma voters rejected a sales tax hike. Monterey County banned new oil wells and fracking. Each one of these measures could inspire pages upon pages of arguments for and against, touting their economic plusses and minuses. But whatever your opinion of any and all, each of them impacts their local areas far more than many of the things our next presidential administration may or may not do.
People tend to think of the US economy as one big, uniform machine—pull a lever here, press a button there, get growth (or not). But in reality, it’s a scattered, complex web of transactions between human beings in various geographies. It’s me ordering cross stitch patterns from a gal in suburban Houston, who buys her wares from artisans in Ohio and Arizona. It’s you, your friends and family having a nice night out and tipping your server, who’s putting herself through school. Imagine 1,000 permutations of that and multiply it by a million, and you’ll start getting the picture. Local measures making these transactions easier or more difficult—cheaper or more expensive—ultimately add up to marginally faster or slower growth.
Now, one ballot measure won’t make or break the economy. But assessing politics’ economic impact requires looking well beyond Washington, DC, to assess how important state and local taxes, regulations, restrictions and incentives will encourage or discourage commerce cumulatively. Beltway blowhards get all the headlines, but local laws making it easier or more difficult to do business have at least as much impact—making them key, and frequently overlooked, drivers of corporate revenues and profits (and, thus, stocks). I can understand those who fear the unknowns in the new administration, but we simply shouldn’t act as though whatever happens in Washington is the only game in town. It may not even be the most important one.
[i] You might say: “Yah, but, what about trade.” That, folks, is the great unknown. Presidents negotiate trade deals, then Congress ratifies them. Trump has talked of renegotiating NAFTA, and legal scholars believe he has the authority to exit the treaty if he wishes. But markets move on probabilities, not possibilities, and there is no way to assign probabilities here. Not yet. That time will come later, once Trump reveals more of his actual agenda, and we’ll stand ready to assess it for you.
[ii] The great irony is that those who stood to benefit from the change—people under 18—didn’t get a say. Democracy is weird sometimes.