Campaign Promises
WHAT TO PAY
ATTENTION TO &
WHAT TO IGNORE
August 2016 | by Michael Arone, CFA, Chief Investment Strategist, State Street Global Advisors
and Gregory Valliere, Chief Global Strategist, Horizon Investments
This US presidential election campaign is one of the most
controversial and unconventional in recent history, and it’s playing
out against a backdrop of anemic economic growth and rising
geopolitical uncertainty. To win the race to the White House,
Democratic nominee Hillary Clinton and Republican nominee
Donald Trump are making the usual campaign promises, ranging
from drug industry pricing reform to renegotiating the North
American Free Trade Agreement (NAFTA).
US Presidential Election Series, Part 1
But how many of their promises can be chalked up to campaign rhetoric and which ones might stand a chance of being implemented
when either candidate reaches the Oval Office? To answer these
questions, I spoke with Greg Valliere, Chief Global Strategist at
Horizon Investments. Greg has followed Washington for investors
for more than 30 years.
Below are Greg’s thoughts on how this US presidential election
might play out, which campaign promises ring hollow and which
ones might actually have an impact on investors come 2017.
MIKE Now that the conventions are over and the
campaigns have hit the road, what is your sense for
how the election will play out?
GREG My sense is that there are three potential scenarios
in this election.
1. In the first scenario, Hillary Clinton wins modestly.
Currently, this scenario is the most likely and it is one
that the market can live with. In this scenario the House
would likely stay Republican, which is important for
markets, and the Senate might stay Republican as well.
This would be an easy transition because the market has
lived with a divided government for eight years.
2. The second scenario is that Hillary Clinton wins
overwhelmingly, perhaps by double digits. While this
scenario is not likely, you cannot rule it out. In this case,
the Senate could flip back to Democrats and the House
might be in play. This might not be quite as popular with
the markets.
3. The third scenario is that Donald Trump wins. While
this scenario is increasingly unlikely, it is not out of the
question. If Trump were to win, chances are the House
and Senate would likely stay Republican, but the markets
would have to worry about uncertainty, which they hate.
A Trump presidency could mean anxiety around a possible
trade war with China, potential conflicts with the Federal
Reserve and anxiety over how Trump would pay for programs
he is proposing, such as tax cuts and infrastructure spending.
MIKE We hear a lot of tough talk on the campaign
trail, but it’s hard to know what is rhetoric vs. what
might have a chance of being implemented once a
candidate takes office. Walk us through your thoughts
on this when it comes to Hillary Clinton’s campaign.
GREG Let’s start with the drug sector. Part of the Democratic
Party’s 2016 platform calls for a crackdown on price gouging by
drug companies and capping prescription drug costs.1 Clinton
has specifically spoken about cracking down on prescription
drug pricing, and I think the drug sector would have to worry
if she won because she could follow through on those promises.
However, other health care sectors, such as hospitals and
nursing homes, might do well, given her support of the
Affordable Care Act.
When it comes to the defense sector, I have a contrarian view.
I believe Clinton is far more hawkish and more Pro-Israel
than Obama, and a Clinton presidency could be better-thanexpected for defense sectors. Given the time she spent as
Secretary of State and her deep knowledge of foreign affairs,
I believe the foreign policy establishment will rally behind
her and she could spend aggressively on defense.
MIKE What about the energy sector? The Democratic
Party platform calls for getting 50% of US electricity
from clean sources within a decade and half a billion
solar panels installed within four years.2
GREG I think a Clinton administration would be quite negative
for coal, and her rhetoric on fossil fuel supports that thesis.
However, I do think it would be positive for alternative forms
of energy, which she has been vocal in supporting. Clean energy
has been a pillar of her platform and she has voiced her desire to
turn the US into a “renewable energy superpower.”
While Clinton may be a negative for fossil fuels, Trump would
be a big plus. His energy platform calls for an augmentation of
the Environmental Protection Agency and a repeal of the Clean
Power Plan. He has supported finishing the Keystone Pipeline
— a point Clinton disagrees with. Trump also wants the Paris
Agreement rejected and opposes the carbon tax.
It appears that Clinton wants to reduce the US’s carbon
footprint, while Trump wouldn’t mind if it expanded.
MIKE What should investors make of talk of the need
for regulatory reform and a crackdown on banks?
GREG I also have a contrarian view here. Under Clinton,
I believe banks would have to worry about smoke but not
fire. What I mean is that while there is campaign rhetoric
promising a crackdown on banks and revising Glass-Steagall,
I think those promises are hot air. I don’t see this type of
legislation getting through what is right now a very
conservative House of Representatives.
With Clinton as president, I think the big banks on Wall
Street will do just fine. Are we really going to get rid of carried
interest? I’ve heard this idea proposed by politicians for 20
years and it never happens. I also don’t believe we will see a
transaction tax on Wall Street. Wall Street would move to
Singapore if a tax like that was implemented.
I am struck, though, by the anti-business tone of her campaign.
There is talk of protectionism and a negative view of free trade.
On the campaign trail, Clinton talks a lot about taxes, including
clawing back tax breaks for companies that ship jobs overseas,
eliminating tax breaks for big oil and gas companies, and
cracking down on ways that companies evade taxes.
This anti-business tone comes through in Trump’s campaign
as well, especially his extreme talk of protectionism and his
very negative view of free trade.
It’s an odd environment right now for business, and I’m torn
as to whether it’s rhetoric or if it’ll translate into something
meaningful under the next administration.
MIKE Let’s switch gears and focus on Donald Trump.
What do you make of Trump’s comments on NAFTA?
GREG While Trump has said he will pull the US out of NAFTA,
I think undoing NAFTA is a hollow promise.3 The public gets
too many benefits from NAFTA, such as cheap goods. This is
why Democrats have pledged to do more in terms of worker
training and assistance to address voter concern that NAFTA
has cost the US well-paying jobs. I can’t see us turning our back
on NAFTA.
What does worry me when it comes to trade is that Trump has
promised a trade war with China.4 He could do this without
getting Congressional approval, and I do worry about Trump
getting provocative with China. The markets would not be
pleased to see a trade war between the world’s two largest
economies in 2017.
MIKE Tax reform is at the center of the Republican’s
growth plan and Trump talks about lowering taxes and
the US debt. What is your outlook on Trump being
successful in these endeavors?
GREG While Trump talks about these issues, he has not
outlined how he will pay for any of them. When asked, he says
he is going to cut “waste, fraud and abuse,” which is a cliché.5 It’s
usually an indication that the candidate doesn’t have a concrete
plan to cut spending.
On the subject of tax reform, one area where I think the stars
could align in 2017 would be that Clinton and Trump could both
be catalysts for tax reform. This might include repatriation of
US corporate profits stashed abroad, which could be a huge
story for drug and tech companies. It could also be a huge plus
for infrastructure, which could benefit from an influx of
government spending that might go toward spending on
infrastructure improvements.
Visit blog.spdrs.com for continued coverage of the
US presidential election and its impact on markets
and investors.
MICHAEL ARONE is a Managing
Director and Chief Investment Strategist
for State Street Global Advisors US
Intermediary Business Group. He is
responsible for expanding SSGA’s
footprint and thought leadership effort
through frequent contributions to the
financial news media, speaking
engagements and client interactions. Michael is a highly regarded
speaker at industry conferences and is the author of several articles
related to investment management practices. He is a member of the
firm’s Senior Leadership Team.
GREG VALLIERE is the Chief Global
Strategist at Horizon Investments.
With over three decades of experience
following Washington for investors, Greg
brings a unique perspective to Horizon
— analyzing policy and politics and their
impact on the markets.
After graduating from George Washington University, Greg cofounded The Washington Forum, which linked Wall Street with
Washington. He subsequently held several positions, including
Director of Research at the Charles Schwab Washington
Research Group.
Greg specializes in coverage of the Federal Reserve, economic
policy and — of course — politics. He is a frequent guest on CNBC,
Bloomberg TV and radio, CNN, Fox Business News and CBS radio. He
is frequently quoted in The Wall Street Journal, Barron’s and The New
York Times.
1
Glossary
2
Carried Interest Carried interest is a share of any profits that the general partners
of private equity and hedge funds receive as compensation, regardless of whether or
not they contributed any initial funds. This method of compensation seeks to motivate
the general partner (fund manager) to work toward improving the fund’s performance.
The 2016 Democratic Party Platform, as of 7/21/2016.
The 2016 Democratic Party Platform, as of 7/21/2016.
3
“Trump vows to reopen, or toss, NAFTA pact with Canada and Mexico,” Reuters,
as of 6/28/2016.
4
“Trump’s trade policies worry economists,” USA Today, as of 7/25/2016.
5
“Where Clinton and Trump Stand on Retirement Programs,”
Kiplinger, as of 7/29/2016.
Glass-Steagall The Glass-Steagall Act, also known as the Banking Act of 1933,
was passed by Congress in 1933 and prohibits commercial banks from engaging in the
investment business. It was enacted as an emergency response to the failure of
nearly 5,000 banks during the Great Depression.
NAFTA The North American Free Trade Agreement (NAFTA) is an agreement among
the United States, Canada and Mexico designed to remove tariff barriers between the
three countries.
Transaction Tax A financial transaction tax is a levy placed on a specific type of
monetary transaction for a particular purpose. The concept has been most commonly
associated with the financial sector; it is not usually considered to include
consumption taxes paid by consumers.
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