Commentary by Clark Wagner, President, Foresters Investment Management Company and Vice President and Chief Investment Officer, Foresters Financial
Elections always generate a mix of hopes and fears. This one is no exception, except, perhaps, that it carries a bit more of the latter than the former. Still, even at this stage, before the vote, it is possible to say three things about how its result will likely affect economic and market prospects:
- Because right now the markets seem to expect a Clinton victory, a Trump win would create the most disruption. Since he is also the less predictable candidate, the increased uncertainty implicit in such an event could prompt at least a temporary selloff, with negative implications for the economy.
- Whoever wins will almost surely face considerable resistance from Congress, a fact that will decrease the chance that either candidate’s major proposals would become law.
- The likelihood is that the economy will see little that will allow it to accelerate from the disappointing growth pace of the past seven plus years.
Although the proposals by the candidates carry a mix of pros and cons for markets and the economy, the most negative proposal -on trade restraint - is put forth by Trump. He would, in effect, build a “tariff wall” against all imports.
According to his campaign literature and speeches, as President Trump would propose an average duty of 20 percent on all goods and services coming into the U.S. from abroad, with higher rates on Chinese and Mexican products. The likelihood of such measures passing into law is a separate issue, but, as proposed, his measures could put the economy into recession. To be sure, the tariffs might protect some domestic production and some jobs, but retaliation against American exports would almost surely put export jobs and production at risk. The exclusion of imports or an increase in their cost would also hamper U.S.-based companies that rely on those imports for their production processes, constraining their operations and putting the associated jobs at risk.
In other respects Trump’s proposals, as they stand, look more pro-growth than Clinton’s. He would cut both corporate and individual tax rates. He has focused primarily on the corporate side, where he would slash the statutory rate from 35 percent today—the highest of all developed nations—to 15 percent, and replace any lost revenue, as well as simplify the code, by eliminating the raft of loopholes presently in place. He is vague about which loopholes he would close, making it uncertain which firms and sectors might suffer in the trade-off, but generally such a move would enhance the economy’s growth prospects. It would also tend to stop so-called “inversions,” through which American firms incorporate abroad to secure lower tax rates. Clinton has remained mute on tax reform. Instead, she has proposed a tax hike on the wealthy, what she calls a “fair-share surcharge” and an “exit tax” to discourage firms from incorporating overseas. The justice of such policies aside, neither could be expected to promote growth.
Spending and Deficits
Both candidates have promised to increase government spending, and their measures would have a mixed economic impact. Trump and Clinton both have proposed to spend billions on infrastructure, roads, bridges, ports, etc. Trump also would allocate more spending to defense. Clinton would arrange debt-free college for all, and also spend billions on improving the country’s manufacturing base and other initiatives aimed at creating good-paying jobs. Although spending, especially on infrastructure, would tend to create jobs and boost the economy, neither candidate offers an adequate plan to finance the spending, suggesting that both would expand budget deficits and so create an offsetting economic drag.
On the regulatory front, Clinton has effectively promised to sustain President Obama’s aggressive regulatory agenda. Although the U.S. economy’s natural resilience has enabled it to adapt to greater regulatory pressure and consequently outgrow the rest of the developed world, a number of economists and business people nonetheless agree that a heavy regulatory hand has likely held growth to a slower pace than would otherwise have occurred.
In particular, Clinton would: strengthen equal pay rules, lengthen paid sick leave, make rules to encourage local banks to lend to small businesses, put regulations in place to make it more difficult to move jobs overseas, extend EPA powers, and limit the lending latitude of commercial banks. Whatever the policy wisdom of such measures, they would nonetheless limit growth potential.
In contrast, Trump promises a pause in all new regulations in order to weigh the health and safety value of existing rules against their economic impact, especially where jobs are concerned. He would also end strictures against oil and gas drilling on the continental shelf, the building of the Keystone pipeline, and what he calls the “job-killing” rules that have stopped other energy exploration and have closed coal mines.
Politics and Prospects
Polls today suggest that the presidential race is tight, but it looks likely that Republicans will hold a majority in the House. The Senate could go either way, but not so decisively that one party will have a filibuster-proof majority. This situation suggests that whoever takes the White House will face opposition in Congress. A Clinton victory would face opposition from the House and, even if the Senate tilts Democratic, enough Republicans would remain to block legislation. Her tax-and-spend agenda accordingly looks doubtful. With a Trump win, even with Republicans in the majority in both houses, his policies would face resistance from Republican Speaker of the House Paul Ryan, who has declared opposition to much of what Trump proposes, especially the tariff wall. Tax reform may get a more sympathetic hearing, as Ryan himself has made similar proposals in the past to those Trump is presently putting forward. Either presidential victor would have a freer hand with her/his regulatory agenda.
With prospects for continued gridlock in Washington, the economy will likely avoid potential shocks from the more extreme proposals put forward by either candidate. Over the longer term, the economy – and the markets – should continue along their current subdued path. In the short term, though, unexpected election results could create notable volatility. Nonetheless, we think that investors should remain focused on the long-term view.
1 Foresters Investment Management Company, Inc. is the investment adviser to the First Investors family of funds and an affiliate of Foresters Financial Services, Inc. Foresters Financial Services, Inc. is the underwriter and distributor of the First Investors Funds.
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