Some stickers wait for their voters on Super Tuesday. Photo by Brett Deering/Getty Images.
As always, our political commentary is intended to be non-partisan and wholly agnostic. We favor no party or candidate, as political bias is a deadly investing error. Our commentary assesses politics solely to analyze potential market impact.
Apparently, not everyone thinks Super Tuesday was so super. With America’s loudest former reality TV star winning 7 of 11 GOP primaries on Super Tuesday—and a septuagenarian dyed-in-the-wool Socialist hogging the youth vote to steal 4 of 12 states from Democratic crown-princess Hillary Clinton—this is truly a bizarre Presidential race. Judging from vote tallies and exit polls, a huge swath of voters thinks this is all just wonderful. And another huge swath thinks it’s all just terrifying. We’re going to stay above the fray—they’re all just politicians, spouting big radical pledges to win votes, jockeying for attention in this noisy circus. For investors, the noise matters only in that it helps set the market’s expectations, which will eventually form the baseline for how stocks respond to the outcome on November 8 and that individual’s first year or so in office. After all, no person or party is inherently good or bad for stocks—Presidents’ influence is too often overrated by investors, and to the extent they do impact stocks, it’s all about what they do, and whether markets decide it’s better or worse than what they presumed would happen. It’s still way too early to handicap that last part, which creates uncertainty—something markets generally dislike. But we’re starting to get a pretty good idea of who the nominees will be, and in two weeks we should have vastly more clarity.
As it stands, Clinton and Donald Trump are the frontrunners, and it would probably take an implosion to derail either.
Exhibit 1: The Delegate Scorecards
Source: The Wall Street Journal, as of 3/2/2016.
Vermont Senator Bernie Sanders, for all the enthusiasm he’s generated with young voters, just hasn’t caught fire with the party’s entire base. Nor has he won over the party’s “superdelegates,” those establishment wonks who aren’t beholden to primary voters. They could yet change allegiance from Clinton to Sanders, especially if an indictment over those emails looks likely, but for now, Clinton has a big edge. As for Trump, he isn’t a lock yet, as the contests thus far awarded delegates proportionately. Texas Senator Ted Cruz is still sort of within shouting distance, particularly after winning his home state Tuesday, but if he (or Florida Senator Marco Rubio) doesn’t clean house in March 15’s winner-take-all contests, Trump will likely get the nod. So, get ready for another two weeks of uncertainty and shouting, which will either be entertaining, annoying or reason to unplug your television, depending on your point of view. And whatever happens, look forward to vastly less uncertainty on March 16, which should help markets.
Yes, whatever happens. For all the talk about any given candidate’s economically unfriendly proposals, what markets hate most is uncertainty. Love or loathe the eventual nominees, just knowing who they are should bring relief (perhaps unconsciously). No more handwringing over whether Tweedle-Dee or Tweedle-Dum will be on the ballot. People will know and can start adapting to that knowledge. Investors can get used to the idea of Rosencrantz or Guildenstern (or Feste[i], if an independent joins the fray) leading the country for the next four years (at least) and start refocusing on their financial future. If they’re happy with the nominees, their cheer could lift sentiment. If they’re unhappy, they can power through the five stages of grief and eventually get on with it, the way society always does. Ob-la-di, ob-la-da, life goes on.
Ours is not a common viewpoint. If you’ve read the financial media during Primary season, you have surely seen one of the many, many articles arguing why any of these candidates will be wonderful or—more commonly—dreadful for markets. Some are based on ideological presumptions, which are often out of step with how markets actually behave. Others are based on general norms about items like protectionism and price controls, without regard to whether any of the policies in question are at all likely to become reality. Reality, not presumption, is what ultimately matters. No one knows now what these folks would actually do when in office. New Presidents often moderate, lest they alienate the independent voters they’ll need to win re-election. Congress often just does their own thing, lest they alienate their own constituents. Bureaucracy often gets in the way, preserving the status quo in its beautifully clunky way.
These candidates aren’t the first to vow to shake things up in government, knock some heads and effect some real change. Nor would any be the first wannabe-shaker-uppers to win an executive office. And if history is any guide, they’ll probably fail massively. Remember when Arnold Schwarzenegger became California’s “Governator” and vowed to slash the budget and whip Sacramento in line? He did neither. Bureaucracy, um, trumped him.[ii] Vested interests are incredibly difficult to overcome, and democratic institutions resist change. State and local governments, environmental boards and permitting systems tend to stall multistate construction projects for years on end. For all the talk on the campaign trail, executive powers are quite limited. Presidents can’t write or repeal laws. Including libel laws. They can’t unilaterally abandon trade agreements. Executive orders, for all the fear surrounding them, have limited reach—they can reinterpret existing laws at the margins and give federal civil servants a raise, but that’s about it. When Presidents try to do too much with their mighty pen, interest groups file suit, and the courts stall implementation. Our founding fathers were incredibly smart men who understood the need for checks and balances. This isn’t Hungary, where a strongman can run roughshod over political institutions and remake the state in his own image. America’s institutions have been tested, survived and thrived for centuries. Trust them.
Our advice: Don’t get overly excited by anything that happens over the next two weeks or eight months. Whether you think __________________ is a political messiah, destined to lift our great country to new heights and preside over a new golden age—or whether you think _______________ is a walking disaster, morally reprehensible on every conceivable level and destined to drive America down the road to perdition—breathe. Pause. And breathe again. No one politician has that much power, for good or ill.
Campaign talk can swing sentiment in the short term, but ultimately, markets will weigh the reality of what the new President does against expectations. And that reality will depend in large part on Congress. As it stands, neither party looks likely to win a supermajority. The Democrats have a structural edge, with fewer seats to defend in traditional opposition territory, but winning big would require unseating some hugely popular incumbents. It could happen if their Presidential nominee generates big coattails, but for the moment, with Democratic primary turnout quite low, that seems unlikely. Most likely, we get a relatively split legislature that plays tug-of-war with the Executive Branch. That typically leads to most legislation stalling out or getting heavily watered down.
Since there is no way to handicap, for now, who will win in November and what they’ll do, it is impossible to know how the election will influence stocks. But here are some possibilities. If markets expect the new President to be a tough-talking protectionist who builds barriers, and they end up with a guy who can’t do anything, that probably sparks relief. If markets expect the new President to crack down on corporate mobility, redistribute resources and slap price controls on pharmaceutical firms, and they end up with a guy or gal who can’t do anything, that probably sparks relief. If markets expect the new President to be totally pro-business, streamline the tax code and make this the best place on Earth to invest, that probably sparks disappointment.
Moreover, it’s worth recalling (and, perhaps, celebrating!) at times like these the fact America doesn’t have a government-directed economy. Our economy is overwhelmingly private sector-led. For investors, that means politics are only one input determining market conditions—economics and sentiment matter, too. Whatever your view of the eventual 45th US President, he or she will have limited influence over our private sector-led economy, just as President Obama cannot be credited for 2008’s bear market occurring while he took the White House or the huge bull market beginning just after his inauguration. The simple fact of the matter is private businesses are incredibly adaptive and can (and have) weathered meddlesome governments and policies before. Without seeing what policies get through and how watered down (or not) they are, there is no way to know how easy or hard businesses’ adaptations may be now. So while you may be thrilled or crushed by how this unusual race is shaping up, we’d suggest there is no rational basis to make investment decisions on those feelings now.
Ultimately, though, come March 16, we can at least start forming reasonable hypotheses and assessing how politics may influence stocks this year and whether traditional election-year market phenomena apply. As the year progresses, how the government will look in January 2017 will come into clearer focus. And, come November 8, election uncertainty will be over. We still won’t know exactly what they’ll do, but we’ll know who will be trying and have a much better sense of what is in the range of probability, based on who controls what chamber of government and by how much. As question marks fade over these next eight months, stocks should get at least a small tailwind from falling uncertainty.
[i] For the record: Feste, Rosencrantz and Guildenstern are this writer’s three favorite Shakespearean clowns. Feste because he sings, Rosencrantz and Guildenstern because they are just awesome.