Sensible Perspectives

Investing and Investment Returns in the Event of a Hillary Clinton Election

Posted by on November 1, 2016

investment returns

This is a companion piece to an earlier note about investment returns in the event of a Donald Trump election. I repeat the first few paragraphs with edits based on my developing thinking about these issues.

In any presidential campaign, there are dueling views about the economic and financial implications of the policies advocated by the various candidates. In large part, this discussion / argument is what campaigns are about. Each candidate makes the case that, if elected, his or her leadership will make life better. Each candidate attempts to assemble a “coalition,” a group of voters who believe they will be advantaged by that leadership and those policies. The candidate with the larger coalition wins. Importantly, it’s often understood that the policies in question will make voters and entities outside of the coalition (at least implicitly) worse off. It’s especially advantageous for candidates to advocate policies that would (apparently) damage only entities and people who cannot vote (or who have only small numbers of votes), such as corporations, illegal immigrants, foreign countries, and the very wealthy.[1]

The policy proposals themselves are frequently broad and vague, emphasizing benefits (to attract the votes of those who would gain) and downplaying costs (so as to minimize the opposition of those who might be damaged or have to pay). Even for very specific policies, detailed evaluation is difficult at best. Very few voters have the time, skill or patience to analyze the proposals, or even to evaluate the analyses conducted by think tanks and other commentators. These analyses are rarely objective anyway – the analysts are often supporters of one candidate or the other.[2] However, I’ve recently become aware of the University of Pennsylvania / Wharton School Budget Model, which attempts to take a non-partisan perspective, and allows visitors to change model assumptions to test their own ideas.

Before considering Hillary Clinton as a candidate and potentially unique president, it’s worth thinking about her simply as a Democrat. Historically, both stock market returns[3]  and economic growth[4]  have been higher in Democratic than in Republican administrations. However, these associations of favorable economic performance with Democratic presidencies seem to have no relationship to presidential policies. In short, if these associations continue to hold, we’d expect higher growth and more exciting stock market performance with Clinton as president, but those who have studied the matter are unable to provide any explanation as to why. Further, as I’ve reviewed the evidence in more detail, I’m not persuaded at all by the evidence of stronger stock market performance under Democratic administrations.

Clinton has made numerous policy proposals. She has posted 41 (!) sets of policy proposals on her website. [For what it’s worth, Trump has only 14.] Obviously, to consider all of Clinton’s proposals would make this a very long article. Therefore, I’ve selected a small number of proposals with potentially large impact.

Broadly speaking, Clinton proposes direct actions to address issues for her constituencies. For some issues, the direct actions are government funded services, for others, the actions are regulations or rules that require non-governmental actors (such as employers) to behave in ways that her constituencies would prefer. This contrasts sharply with Trump, who, with the exception of his tax plan, proposes largely indirect actions (that is, reducing immigration, renegotiating trade agreements, and encouraging foreign governments to take on more responsibility for their own defense have no directly traceable benefit to any citizen).

So, if enacted, what impact would the five proposals above have?

As with any presidential candidate’s proposals, the road to reality is long and uncertain. Any action that requires funding requires Congressional approval. Usually, a good deal of negotiation and deal-making is involved, and Hillary would likely be dealing with a (hostile) Republican majority in the House of Representatives, and a large (hostile) Republican caucus in the Senate. None of these proposals is likely to emerge unchanged, and few of them are likely to emerge at all.

Secondly, the ultimate impact of a president’s policies and decisions on an economy and the stock market is likely relatively small. The largest effects are due to changes in incentives – tax rates, benefit levels, and the like. Of the five policies we’ve examined, only the tax policy is of that character, but tax policy is enormously complicated from a political perspective. Several Congressional experts have substantial credibility with their colleagues, and interest groups will be, well, very interested in the outcome. I’ll be very surprised if the tax policy that emerges is recognizable as Hillary’s.

A Clinton presidency, based on her proposals, is likely to have minimal direct impact on the stock market, and even on the country more broadly (at least in the short term). Most of her programs would take a long time to implement, and even longer to take effect. Only the infrastructure program would have a direct spending impact. Criminal justice reform could have a large impact on the economy, but fewer than 10% of prisoners are in Federal confinement. Education is largely a creature of state governments. The Social Security plan is more of a headline than a well-thought-out proposal.

Presidents can accomplish only a few major programs. The 41 programs on her website are more of a laundry list than a plan of action. If she is elected, Hillary will have to choose where she will focus. Based on what we know so far, investors need not have great fears, but they should not have great expectations, either.

[1]Incidentally, it is this asymmetry that has led to the municipal pension underfunding crisis. Voters and governments that approved the contracts incorporating the pension benefits didn’t pay for them. That left their successors and descendants, who had no vote on the contracts, on the hook.

[2] For example, the Brookings Institution is often associated with the Democratic Party, and the American Enterprise Institute with the Republican Party.

[3] Santa-Clara, P. and R. Valkanov, The Presidential Puzzle: Political Cycles and the Stock Market. The Journal of Finance, 2003. 58(5): p. 1841-1872.

[4] Blinder, A.S. and M.W. Watson, Presidents and the US Economy: An Econometric Exploration. American Economic Review, 2016. 106(4): p. 1015-45.