By now, you’re probably a bit fatigued by the nonstop coverage of this year’s presidential election. While the campaigns have devolved into a constant sideshow on the cable news networks, the financial markets have been subdued during the slow trading of the “summer doldrums.” Volatility has been particularly low.
However, markets may starting to pay attention to what’s in store in November. By most accounts, there will be some serious upheaval if either Republican candidate Donald Trump or Democratic candidate Hillary Clinton wins.
Pick Your Poison
There has been quite a bit of buzz about “What will happen to the economy if Trump is elected?” and “What will happen to the economy is Hillary is elected?”
There are indeed two other candidates polling above 1%—Libertarian candidate Gary Johnson and Green Party candidate Jill Stein. However, most pundits don’t expect Johnson or Stein to factor into the final result. Depending on how events shake out over the next two months, especially with which candidates are allowed to debate, it could be misguided to count out Johnson’s impact entirely. He may not win the election, but he could impact the outcome; there’s even a far-fetched electoral scenario where he could come out on top if the Electoral College reaches a stalemate and the decision is kicked to Congress.
Nonetheless, it’s worthwhile to focus on the implications of the likely result that either the Democrat or Republican nominee will be the next president. In both cases, we could well be looking at a “Black Swan election.” In their own rights, both Trump and Clinton have made promises on economic policy that experts say are unrealistic and unlikely to make it through the legislature. In short, both candidates are generally expected to do more damage than good to the U.S. economy.
Feeling Out the Fed
The Fed occupies the key intersection between the election and the economy. While Trump has said he would use his executive power to replace Fed Chair Janet Yellen (something that can’t happen until 2018), many are boiling down this year’s unusual election cycle to whether or not the next president will appoint liberal or conservative officials to the Fed and, crucially, the Supreme Court.
Until the election, the Fed would prefer to lay low to avoid the appearance of politically-charged meddling. Unfortunately, it will be hard-pressed to do so with so much apparently hinging on the central bank’s interest-rate policy. The next FOMC meeting will be held over two days from September 20 to September 21.
According to Barclays economist Robert Martin, the Fed could use September as a “Goldilocks moment” to raise interest rates. It’s highly unlikely the FOMC would make any changes in November just days before the election. The only other opportunity for the Fed to make good on its intention of “at least” one rate hike in 2016 is in December. With the labor market seemingly in good health, September does seem like a prime opportunity for the Fed to raise the federal funds rate by another quarter point (25 basis points).
With all the confusion surrounding monetary policy and the upcoming election, even pension funds are resorting to unorthodox tactics under these market conditions. Higher interest rates don’t bode well for Wall St—and it’s unlikely that either a Republican or Democratic victory in November will be kind to stocks, either.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.