We are a year away from the 2020 US presidential election and still four months away from the primaries that will decide who the Democrats put forward to challenge Donald Trump for the White House. But there’s one name on everyone’s lips right now, the firebrand Massachusetts senator and former Harvard professor, Elizabeth Warren.
It’s not just politics geeks who are weighing up her chances. With a detailed political agenda that right-leaning voters in the US consider somewhere between radical and outright socialist, investors are tracking the polls closely too. So, what might a Warren Presidency look like and how would it impact the markets?
It’s worth pointing out at this stage that a Warren victory next November is not the base case. She is still behind Trump in the polls, albeit by a rapidly-narrowing margin. But she is becoming the front runner to win the Democratic ticket, as Joe Biden’s age and alleged family skeletons start to count against him.
Investors are right to take seriously the prospect of a change at the top next year. Historically, stock market returns have lagged in the first year of a new political party taking over the White House. In the case of a Warren victory over Trump, there is a clear consensus that certain stock market sectors could be hit hard, although the impact could be mitigated to a degree by an expected fall in the dollar. The Senator has said she would ‘actively manage’ (read weaken) the currency to bolster US jobs and growth.
As for the impact on the bond market of a Warren win, views are divided. On the one hand, expected lower growth might argue for lower bond yields. Equally, however, a rise in government spending and further deterioration in the US’s budget deficit makes the case for yields to rise from here.
Warren’s proposals on tax are likely to be the key driver of the stock market response to the 2020 election. She has said the 1,200 or so largest US companies will face an additional 7% tax on any profits above $100m. Employers will contribute to a new 14.8% payroll tax on earnings above $250,000. Employees will pay a share of that too, while the very wealthiest will face an annual 2% levy on assets above $50m. Anyone trying to avoid that by renouncing their US citizenship will be relieved of 40% of their net worth as an ‘exit’ tax.
Corporate earnings, which are already on the slide, would be further hit by a $15 minimum wage, universal childcare costs, paid family leave and a string of other measures that are not dramatic in isolation but add up to a significant overall shift from capital to labour.
Four stock market sectors are attracting the most attention and have seen a marked inverse correlation with Warren’s improving poll ratings. As the odds have shortened on her standing against Trump next year, the shares of healthcare, financial, energy and technology stocks have rolled over as investors price in a less favourable environment.
Healthcare, particularly so-called managed-care stocks have fallen on the back of Warren’s Medicare for All proposals. It should be noted, however, that the end of private health insurance is much more
popular with Democrats than Republicans and her position might well end up being significantly watered down between the primaries and the election.
Banks, which have been in decline relative to the wider market for a couple of years now, could come under greater pressure if Warren’s plan to restore the Glass Steagall segregation of commercial and investment banking gains traction. Falling bond yields would intensify the squeeze.
When it comes to energy there could be winners and losers. A moratorium on fracking and offshore drilling is a negative for large US oil companies but could be offset in the short term if a supply shortage pushes the price of crude higher. A Warren presidency should be good news for the renewable energy sector.
Finally, technology is in the Senator’s cross-hairs. Warren has threatened to break-up the FAANGs in an echo of Theodore Roosevelt’s assault on Standard Oil’s monopoly a hundred years ago.
So, this is a pretty radical agenda, particularly by US standards. It marks a shift in power from business executives and owners to workers, an increase in government intervention, and a big change in the incentives for investment and work. The tax measures alone, Warren claims, could raise $3.8trn over a decade, money that she would put to work reducing student debts, tackling the opioid crisis and launching a green manufacturing revolution.
Whether much of this ambitious plan sees the light of day will depend on the shape of the US Government after next year’s election. If Warren were to win the White House, she would likely be supported by a still Democrat House of Representatives but face a Republican Senate. This would make many of her plans a non-starter.
One key exception to this might be her corporate tax proposals which can be enacted using so-called reconciliation rules, which over-ride Senators’ ability to kill measures that they don’t like with endless debate, a process known as a ‘filibuster’. It really is quite difficult to get anything done in the US.
Whether these rules get to be tested at all in a year’s time will depend very largely on the state of the US economy and the health of Wall Street over the next 12 months. The US stock market has been a great indicator of election results. In every election since 1984, according to Strategas Securities, the incumbent party has won whenever the market has risen in the 90 days before the election, and vice versa.
No wonder, President Trump is so keen for the Fed to stimulate the economy. His worst-case scenario is a doom loop in which fears of a Warren presidency spook investors, trigger a slowdown and by doing so bring on the outcome he and the market most fears.
Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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