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Politics and the Market

May 16, 2016

BY MONTAG

As this very interesting presidential election takes shape, we are getting a lot of questions about market/sector impact of specific candidates.  I thought I’d outline the market pros and cons of each platform, with two caveats:  (1) policy is one of many factors influencing our investment decisions, and (2) this is not intended to endorse or encourage any specific candidate.

Hillary Clinton plans to expand Medicare/Medicaid, support renewable energy and work against fracking and coal, raise taxes on high earners, increase federal investment in infrastructure, require investors to have a longer stock holding period to qualify for long-term capital gains treatment, and possibly limit additional retirement contributions for taxpayers who have high-balance retirement plans.  These priorities will help hospital stocks, solar and other renewables, industrials, and building material companies.  Her platform is negative for traditional energy companies and pharmaceuticals.

Donald Trump plans to expand defense and security, lower US corporate taxes (particularly on international profits), encourage infrastructure (‘build the wall’), and lower the capital gains tax.  His platform would be positive for building materials stocks, energy stocks and potentially consumer discretionary stocks if lower taxes lead to increased consumer spending.  If he limits immigration and decreases H-1B visas we could see a negative impact on technology firms.

BOTH these candidates favor negotiated drug prices for Medicare (significant threat to pharmaceutical companies,) and both oppose the Trans-Pacific Partnership (TPP) trade deal.  Most US multinational companies have been lobbying for the TPP and would be disappointed to see it fail (although failure is largely priced into stocks already).  Clinton favored the TPP earlier and may not oppose it as fervently if elected.

A Clinton presidency with continued Republican control of Congress would temper the more severe proposals and likely be the most welcomed result for the market short-term.  A third party candidate or brokered Republican convention candidate would provide a brief relief rally for pharmaceuticals and multinationals.   One rule of thumb has been consistent for the stock market:  divided control and relative government inaction provides the best outcome.

Lest you think the US presidential election is most critical to the markets, our favorite Washington analyst will tell you ‘not even close’.  Angela Merkel , Chancellor of Germany, is up for re-election next year.  Her leadership and influence in Europe has been unprecedented, and if she does not run for another term or is voted out, particularly at such an economically critical time for the European Union, the impact will be significant.

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