Well it’s almost over! American voters head to the polls on November 8 to elect the 45th President of the United States, and for even us political junkies, this day couldn’t come sooner. By one measure, this US election cycle will have lasted nearly 600 days, with 22 primary debates, 3 Presidential debates, and a whole lot of craziness in between. Will it be the establishment candidate and Washington insider “crooked Hillary” or the orange-faced, reality TV star, real estate mogul and all around whack-job Donald J. Trump?
It is increasingly looking like Hillary will pull out the win with her widening lead in the polls. According to the RealClearPolitics polling average, Clinton now leads Trump by a commanding 6 points, and with only 2.5 weeks to go, something drastic would have to occur to alter this trajectory. Looking at historical polling data, the closer we get to the Election Day the higher the predicative power of the polls, making it a major uphill battle for Trump from here. Against this backdrop we wonder what impact a Hillary win could have on the economy and equity markets?
In reviewing Hillary’s proposals we find a lot of similarity with Prime Minister Justin Trudeau’s election platform with the focus clearly on the middle class, largely through the redistribution of income. Unlike Trump who proposes major personal and corporate tax cuts across the board, or as Hillary coined it “Trumped-up tickle down economics”, Hillary would target her tax cuts to the middle class. She is proposing a number of tax initiatives and polices such as increasing the child tax credit, making university tuition free for families making less than US$85,000, and raising the Federal minimum wage from US$7.25 per hour to US$12. Overall, her tax plans would cut taxes for 80% of Americans, according to the non-partisan Tax Policy Center.
To pay for all these tax cuts and initiatives she would raise personal tax rates by 4% on individuals earning more than US$5 million, enact a new minimum effective tax rate of 30% (the “Buffett Rule”), and eliminate other tax benefits for the wealthy such as the carried interest provision and caps on itemized tax deductions.
The economic impact of Hillary’s policies is, of course, greatly debated with often conflicting views on whether they will boost economic growth. The left believes that the tax cuts for the middle class will boost spending and growth, while the right believes taxing the rich will crimp investment and economic growth.
Our view is that we see Hillary Clinton’s policies likely being net neutral for their economy, with the main thrust of her policies being more about the redistribution of wealth rather than wealth creation. That said, one area where we much prefer Hillary’s plan over Trump’s is on deficits and debt levels. Under Trump’s aggressive tax cut plan, government tax revenue would drop significantly, resulting in trillions of dollars of new debt over time. According to the Committee for a Responsible Federal Budget, they estimate that Trump’s plan would add US$11.5 trillion in new debt, causing debt held by the public as a percentage of GDP to rise to 127% by 2026. In contrast, they estimate Hillary’s plan would add US$250 billion in new debt over a decade, pushing debt to GDP to 87%.
With us being deficit hawks and having real concerns over the rising debt levels in the US, we have a clear preference for Hillary’s plan over Trump in this regard.
Debt Levels for the Candidates’ Proposals (% of GDP)
Moving on to the equity market implications, a Hillary win would be bullish for the US stock market based on our research. Contrary to what most believe that Republican’s pro-business stance is bullish for the stock market, actual historical price returns show a much different story. Since 1945 there have been 8 Democratic Presidents and 9 Republican Presidents. We calculated the average return in the first year of a President’s term under both Democratic and Republican Presidents with the results shown below. On average, the S&P 500 gains 15% in the first year under a Democratic President versus -2% under a Republican President. Moreover, the S&P 500 was positive in 7 of the 8 years under a Democratic President in year 1 versus just 3 of 9 positive returns under a Republican President.
While I can just see some of the pro-Trump blog dogs salivating to rip into me and our view that Hillary would be better for the stock market, it’s hard to deny how bullish these statistics are for stock returns heading into next year under a potential Democratic President. This was also evident following the first two debates where the S&P 500 rallied the following day as Hillary was declared the winner in the debates.
Let’s just hope that there’s no last minute surprise by WikiLeaks or some Russian hackers that derail Hillary’s commanding lead over Trump.
S&P 500 Average in Year 1 of Presidential Term