Asset Management: Multi-Asset Insights

(Un)popularity contest? Markets may not care

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The multi-year U.S. presidential marathon is quickly winding its way to the finish line, although for many it cannot end soon enough: the two major party candidates now boast the highest unfavorability ratings in recent electoral history. While we closely monitor the election, the president’s political affiliation tends to have little effect on markets over the long term, as S&P 500 returns in different administrations show, below. Since World War II, the four best and four worst presidents for stock market returns have both included two Democrats and two Republicans. The policies of the candidates and the general uncertainty around their implementation, however, do have implications for the broader economic backdrop, most noticeably sector-based returns. Today especially, implementing coherent and effective policies that drive economic expansion seems more crucial than ever amid continued slow domestic growth.

*Return above the rate of inflation. Source: Bloomberg, BMO Global Asset Management.
*Return above the rate of inflation. Source: Bloomberg, BMO Global Asset Management.

Hillary Clinton survived her primary battle with Bernie Sanders by shifting further to the left in an effort to curry favor with the skeptical progressive wing within the Democratic Party. She has decried the excesses of Wall Street (despite having deep ties to the industry) and called for a significantly higher minimum wage, and she plans to raise taxes on the highest earners. Her platform generally mirrors the policies of the Obama administration with a slightly more liberal tilt on economic matters. Her focus on slowing the rise of drug prices bodes poorly for the pharmaceutical sector, while her continuation of the Obama Affordable Care Act should benefit hospital operators.

Donald Trump has run a highly unconventional campaign focused primarily on two key themes: a protectionist trade policy and curbed immigration. He has expanded his platform recently to include an across-the-board tax cut for individuals, corporate deregulation and a less expansive foreign policy. Sectors such as energy could benefit from deregulation and a change in the tax code, while sectors such as technology could suffer from tighter immigration controls.

Where do their platforms overlap? Infrastructure spending, and to a lesser degree trade policy. Construction firms and materials producers should benefit from either candidate as infrastructure spending picks up post-election and economic activity receives a bump. As for trade, Trump has argued against NAFTA and the unratified Trans-Pacific Partnership (TPP) and condemned currency manipulation by China. Popular skepticism against free trade has caused Clinton to turn against the TPP – a trade deal she once favored – and adopt a more protectionist philosophy. Slowing global trade would provide a headwind for multinationals and exporters, but the diversified U.S. economy, coupled with World Trade Organization protocols to prevent tariff wars, would dampen the effect on the broader economy.

Meanwhile, Democrats now have a slight edge to win a simple majority in the Senate, while Republicans should likely hold the House, meaning a split government is the base case regardless of the outcome in the presidential race. We view a split government as a positive backdrop for investing, as no single party can blindly pursue its own agenda. New laws and regulations would receive greater scrutiny and bipartisan compromise, reducing the risk of sweeping changes that could imperil stability. While lingering polarization and a split government will likely prevent compromises on important issues such as taxes and immigration, increasingly we have seen moderates from both parties emerge victorious from bruising primary battles – perhaps a sign voters are shifting their focus from divisive rhetoric back to results.

While the U.S. presidential race provides intrigue, neither candidate will have the ability to unilaterally change domestic or international policy in a drastic sense. Policy analysis is an important component of our work as long-term multi-asset investors, but we must combine this analysis with our view on the broader macro environment, which at the moment looks relatively benign.

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