2016 Elections – Nominees, Start Your General Election Engines

As the conventions have concluded, the general election season now begins in a focused effort to attract independent (and cross-party) voters.

July 29, 2016

Paul Christopher, CFA®, Head Global Market Strategist
Craig Holke, Global Research Analyst

  • Every four years, the political climax of the summer is the convention season, when presidential nominees and their running mates are formally recognized and rally their parties around the ticket.
  • As the conventions have concluded, the general election season now begins in a focused effort to attract independent (and cross-party) voters.

What it may mean for investors

  • The U.S. equity market does not appear to have priced in a winner yet.
  • We advise investors to keep their investment plan focused on the economy, for now, and to look to the debates, beginning in late September, as the next major opportunity for nominees to attract voters. We plan the fifth installment in this series to be available as a guide to the debates, and intend to publish it in mid-September.

Every four years, the political climax of the summer is the convention season, when presidential nominees and their running mates are formally recognized and rally their parties around the ticket. Now, the general election season begins in a focused effort to attract independent (and cross-party) voters. We see several key issues in this election. In this report, we review those issues and offer our perspectives for investors.

Table 1 notes the nominees’ respective positions and compares them to the positions laid out in the party platforms. Each convention arms the nominee with a platform of the party’s positions and proposals. In modern times, the nominees have not paid much attention to their party platforms. Nevertheless, we track the disagreements between nominee positions and the party platform as potential sources of disunity that could block a new president from implementing campaign promises.

Every election offers issues that divide the candidates. Yet the varying positions detailed in Table 1 arrive with singular timing for investors:

Impact on the U.S. economic expansion: The U.S. economic recovery, now in its eighth year, is showing signs of maturing. Inflation is normalizing, while household and business debt levels are recovering. The economic-cycle’s longevity could be unusually sensitive to the next administration’s policy path. Some key legislative choices include the direction of fiscal policy and health care.

Trade at risk: Global trade has contracted sharply during the past several years. Perversely, the slowdown in global activity presents additional risks for trade, typically as some political leaders reflexively become more determined to protect jobs in export industries. During the primary season, the two nominees may have sounded extreme in their trade-policy positions, while they appealed to their base voters. As the general election season commences, we are watching most carefully for moderate promises on trade policy.

Table 1. The Parties Don’t Always Agree With Their Nominees on IssuesTable 1. The Parties Don’t Always Agree With Their Nominees on Issues
Source: Wells Fargo Investment Institute, 7/25/16.

Immigration is becoming a global flashpoint: UK voters recently chose to leave the European Union, making Great Britain the first member country to do so. At issue were government austerity measures and, especially, the large inflow of immigrants. Both are foundational directives coming from Brussels but have created deep divisions, both within the UK and between London and European Union headquarters in Brussels. Immigration also is a deep issue for U.S. voters, many of whom are descended from immigrants but who struggle today with perceived economic and security risks in current immigration trends.

Fiscal policy: The next president and Congress probably will face a newly widening budget deficit. Revenues have eased with economic growth in the past year, while expenditures are resuming their growth after Congress’ self-imposed sequester ended late last year. Tax relief is a part of each party’s platform and a prominent part of each nominee’s public statements.

Not yet time to pick a winner

Whether investors should plan for a President Clinton or a President Trump is still a close call, in our opinion, but several factors may allow a clearer forecast as the season progresses. As we wrote in our last election report, the overarching factor is how well the parties and their nominees achieve unity on various levels in the time remaining before the election.1 We review those possible outcomes (by level) below:

Level 1—unify the party: The vice presidential candidate typically balances the ticket for the party and voters, but also is often a former legislator who can liaise with Congress. This is the case in this election. In our view, both presidential nominees helped their campaigns with their running-mate selections. Both Gov. Pence and Sen. Kaine represent the center of their parties’ ideologies and are experienced legislators and state governors. Additionally, both complement their presidential candidates, adding some establishment conservative credentials (Gov. Pence) and support from a key swing state (Virginia, from Sen. Kaine).

The conventions are important as the events that end the primary season in a show of unity. The Democratic convention put a strong emphasis on fusing the left and center-right parts of the party and marked some success in putting away the differences of the primary season. Sec. Clinton’s choice of Sen. Kaine suggests that she felt comfortable enough to choose a centrist over someone closer ideologically to her main primary opponent, Sen. Sanders.

By contrast, the Republican convention featured prominent disagreements in prime time. Mr. Trump’s primary rivals mostly refused to endorse him (e.g., Sen. Cruz) or did so reservedly (such as House Speaker Paul Ryan and Senate majority leader Mitch McConnell). In his acceptance speech, Mr. Trump urged his supporters to rely on him but did not mention working with Congress. His strategy may be to maintain distance from the party establishment, but the cost may be alienating Republican voters.

We also note the collaboration gap between Mr. Trump and the party leadership. Although the candidates have a role in shaping the platforms, as noted, past candidates from both parties have chosen to ignore or downplay their party’s platforms. Nevertheless, the gap between a candidate’s views and the platform can show the divide between the candidate and the party. For example, both party platforms viewed trade pacts favorably in previous elections but have turned more cautious in this election, mirroring apparent voter frustration with free trade in the recent primary season. Nevertheless, Mr. Trump’s campaign trail promises to renegotiate or reject recent trade pacts stand in sharp contrast to the more cautious Republican party platform. The distance between the party’s platform and Mr. Trump’s positions points to divisions that could cost Mr. Trump Republican support on Election Day.

Level 2—unite with independent voters: Both parties face significant challenges to win undecided voters by Election Day. Chart 1 shows how different this election is from others in the past 50 years. Historically, when the two candidates have high combined favorability ratings in the polls just before the election, turnout tends to be high. Lower favorability ratings tend to reduce turnout. In this election, the combined favorability rating could be the lowest recorded since 1952, setting up potentially low voter turnout and complicating predictions of a winner.

Chart 1. When Presidential Candidates Have High Favorability Ratings, Turnout Tends to Rise*Chart 1. When Presidential Candidates Have High Favorability Ratings, Turnout Tends to Rise*
Sources: The American Presidency Project at the University of California, Santa Barbara, Gallup, and Wells Fargo Investment Institute, 7/22/2016. * Percentage of poll respondents who rated the two candidates as highly favorable, as of the final week before each election. The 2016 poll data were the latest available when this report was written, on July 22, 2016. Poll data were unavailable for the elections of 1988, 1996, and 2000.

Level 3—create a unified Congress for next year: A strong victory by a presidential candidate often sweeps party colleagues to victory in the congressional races. Sec. Clinton could win by a large enough margin that the Senate turns to a Democratic majority. Chart 2 shows that four Republican Senate seats are vulnerable and could flip control of the Senate to the Democrats. Yet, to date, the Senate races are not moving to favor the Democratic candidates (even though Sec. Clinton leads in many polls).

Chart 2. Current U.S. Senate Seating and Forecasts for Seat Vulnerabilities in 2016 Elections*Chart 2. Current U.S. Senate Seating and Forecasts for Seat Vulnerabilities in 2016 Elections*
Sources: University of Virginia Center for Politics and Wells Fargo Investment Institute, 7/22/2016

The more the candidates can promote unity on all three levels, the greater the likelihood that today’s campaign promises may become policy in the next government. Yet, each party faces substantial challenges. As discussed above, we see significant divisions in the Republican party coming out of its convention. For their part, the Democrats likely will confront a divided government, even if Sec. Clinton wins her election. Moreover, the presidential candidates’ low favorability ratings are likely to undercut turnout and the popular mandate of the new president.

Although there are only two presidential candidates, predicting market outcomes is complicated by the hurdles that the two candidates and their parties face to enact their policies next year. The difficulty of predicting who will win the White House, to this point, may explain why equity prices do not appear to be in sync with the polls (Chart 3). The S&P 500 price index appears to be tracking factors other than the candidates’ popularity.

Chart 3. The S&P 500 Index Is Not Yet Moving with the Presidential Popularity Polls (Weekly RealClear Politics poll average vs. week-ending S&P 500 Index)*Chart 3. The S&P 500 Index Is Not Yet Moving with the Presidential Popularity Polls (Weekly RealClear Politics poll average vs. week-ending S&P 500 Index)*
Sources: Bloomberg and RealClear Politics, and Wells Fargo Investment Institute, 7/28/2016 * Weekly RealClear Politics average poll of two-way race between Mr. Trump and Sec. Clinton. S&P 500 Index shown is the SPX (price index).

Conclusion

Election news may increasingly move markets between now and Election Day (November 8), but we make two observations:

  • Each party faces challenges as it attempts to unify itself and reach out to independent voters. Principally, the historic unpopularity of both presidential candidates may demand further patience from investors looking to predict the eventual winners and market implications.
  • This election arrives just as circumstances give some policy issues potentially large impacts on future investment returns.

Many investors are well aware of the timing impact of the 2016 elections and are seeking to position their portfolios to greatest advantage. We appreciate the growing urgency as Election Day approaches, but each party still faces considerable work to persuade undecided voters. Also, the race appears close and could be even less predictable if turnout is as low as we expect. Most of all, the U.S. equity market does not appear to have priced in a winner. We advise investors to keep their investment plan focused on the economy, for now. We believe the candidate debates, beginning in late September, will be the next significant opportunity for the nominees to attract independent voters. We plan the fifth installment in this series to be available as a guide to the debates—and intend to publish that report in mid-September.

1 “The 2016 Elections: March Toward Unity”, Wells Fargo Investment Institute, May 25, 2016.

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