Trump vs. Clinton: Policy Implications for Economics and Markets

Trump vs. Clinton: Policy Implications for Economics and Markets

With the Iowa caucuses less than 30 days away, presidential campaigns are in full swing. Judging by the poll numbers, Donald Trump, a Republican, and Hillary Clinton, a Democrat, are most favored to secure their respective party nominations.

The candidates’ platforms vary considerably in areas of tax, energy, and security, but both outline a willingness to intercede in certain markets for policy goals that are likely to elevate political risk and market volatility going forward. Trump decrying “unfair” trade deals with China and proposing tariffs as a way to bring back jobs from overseas; Clinton vowing to legislate increases to the minimum wage and force investors to hold stocks and bonds for a minimum time period to rein in Wall Street speculation.

In a nation predicated on free markets, both candidates could be described as interventionists based on stated policy proposals.

In a world that has become increasingly accustomed to the market-moving potentials of seemingly trivial details such as the presence or absence of one word in the official Federal Reserve statements, the political uncertainty associated with such hands-on economic initiatives will further complicate investor interpretation efforts.

Stable markets are associated with higher degrees of certainty, so growing political involvement in capital, goods, and labor markets undermining investor confidence represents the major overarching risk posed by both candidates as more weight is given to an infamously fickle indicator — political positions. Beyond this general risk premium, what specific intervention risks are foretold by the front runners’ stated priorities so far?

Donald Trump’s counterintuitive position on free trade

Ever the showman, Donald Trump’s inclination for bombast and hyperbole can obscure tangible and consequential proposals for market intervention.

One of the most blatant instances of this is in the realm of trade policy. In response to what he describes as America being suckered by trade partners such as Mexico and China, Trump advocates the kind of protectionist trade practices reminiscent of the 1930’s. On separate occasions the potential Republican nominee has pushed a 20% tariff on all imports, a 25% tariff on Chinese imports, and a 35% tariff on any American automaker importing cars manufactured overseas in China in lieu of a domestic production facility.

Not only would such protectionist policies make the imports Americans consume everyday more expensive, such a provocative act invites reciprocation by one of the world’s most powerful markets and sets the stage for a trade war that exaggerates the risks to an already fragile world economy.

Moreover, the backdrop of a world awash in debt, deflationary pressures confounding central banks, and rising geopolitical tensions is eerily familiar to the global circumstances upon introduction of the Smoot-Hawley Tariff Act in 1930 that is widely credited with facilitating the Great Depression.

To be sure, Trump’s positions on trade contradict those held by most, if not all, of the GOP majorities in the House and Senate.

A Trump presidency would still face a Congress more endeared to free trade and open markets than tariffs, no matter the myriad problems inherent in such large and complicated agreements. However, investors would be wise to not underestimate a Trump administration as he has demonstrated a habit of repeatedly laying waste to pundits’ and strategists’ predictions throughout the campaign thus far.

No matter the Constitutional obstacles, a wide and clear path carved by a departing President Obama could make it easier for an audacious President Trump to take unilateral intervention — the impact of which on markets is, well, ‘HUGE’.

Hillary Clinton’s position: a ‘level’ playing field through regulation

While lacking the braggadocio of Trump, Hillary Clinton appears no less inclined to target unwelcome economic realities with biting government rules.

Although contrary to Trump’s departure from the Republican Party’s conventional economic policies, the Secretary of State stays comfortably within the Democrat Party platform while tackling issues such as the abuses of Wall Street. In addition to instituting sharp increases in capital gains taxes on short-term investors, Clinton has proposed reinstating the Glass-Steagall Act, imposing a ‘Risk Fee’ on large financial corporations and further imposing a tax on certain financial transactions.

The financial world has changed tremendously since the 1999 repeal of Glass-Steagall, an other throwback to the 1930’s that prohibited commercial banks from engaging in the investment business with depositors funds.

So many trillions of dollars of capital, securities, and derivatives have been allocated, or even born into the current framework, that it is hard to imagine how disruptive a reversion to the old rules would be. At the very least, such a change in law would mean massive re-allocations of bank capital leaving investment markets to achieve legal compliance.

This risks an unprecedented outflow as so much capital entered these markets in search of yield since the advent of Zero Interest Rate Policies in 2008/2009 that has just now ended.

Additional market interventions by a President Clinton, such as a financial transaction tax aimed at short-term traders, could be suffused with unintended consequences that pose significant risks to financial markets.

These taxes aim to curb speculation, and especially High Frequency Traders (HFT) that use computer algorithms to make thousands of bids and offers on a security in fractions of a second.

The problem is that such a tax’s reach would extend to nearly every participant in the market — HFT accounts for nearly half of all exchange volume on any given day and the same methods are used to efficiently enter and exit securities by even mutual and pension funds with long-term investment horizons. An intrusive rule intended to help ‘level the playing field’ actually risks raising costs and lowering returns for the retirements of firefighters and teachers across the country.

Extra-political risk outlook for 2016

More than the mere scouring of Fed texts for vocabulary words like ‘transitory’ or ‘patient,’ a Trump or Clinton presidency would mean market participants will have to decipher political intentions and prepare for a wider range of policy-related interference in the markets, as well as the unintended ripple effects often associated with such government action.

Further detaching short-term price action from underlying fundamentals, market direction would be even more susceptible to even the most arbitrary political winds and thus inflate base levels of risk and volatility.

Speaking of political winds, ‘certainty’ is not an oft used term with still so many months of campaigning left to do before party nominees are picked. For investors, an outside chance that sound economic principles and lessened market reliance on political whims is represented on one ticket, or the other, may be the only winning bet — however long the odds.

Categories: North America, Politics

About Author

Jeffrey Moore

Jeff Moore is a Senior Analyst with Global Risk Insights, and Founder & Owner of Moore Insight Inc., a political risk consultancy helping high net worth clients, independent asset managers, international business operators, and even political candidates add value by informed analysis of, and customized solutions for political risks to capital, business strategy, and target constituencies. His insights have been featured and sought by state, national, and international media as political risk mitigation becomes more important by the day. Previously Jeff worked as a capital reporter for traditional media, a research analyst in the N.C. Department of Commerce, and an economic policy aide in the N.C. Office of Governor. After receiving a degree in Political Science from the University of North Carolina, Jeff cut his teeth as an equity trader, successfully trading millions in capital through out the Great Financial Crisis and beyond.