A number of weeks ago – before the release of the Access Hollywood tape that threw Donald Trump’s campaign into turmoil – we predicted that Hillary Clinton would win the presidential election. At the same time, we predicted that the Democrats would seize control of the Senate, but that the Republicans would keep control of the House. Events since that time threaten to affect how the markets may perceive these election results.
Control of the House
Some political commentators are now suggesting that Trump’s precipitous fall could cost the Republicans control of the House as well as the Senate. Democratic control of the House would remove a check on Clinton’s ability to implement her legislative priorities, which include increased spending on social programs and higher taxes on affluent families.
When one party controls the White House and both houses of Congress, the possibility of Congress passing sweeping legislation antithetical to businesses becomes much greater. During the first two years of his presidency Obama enjoyed a filibuster-proof Congressional majority. Those years saw the passage of the Affordable Care Act, Dodd-Frank bank reform, and other sweeping legislation viewed by many as harmful to business.
Recent turmoil notwithstanding, we do not believe that the Republicans in fact will lose control of the House in this election. Thus, we continue to see a Clinton presidency as a continuation of the Washington gridlock of the last six years (since the Republicans assumed control of the House in 2010). Few initiatives will be enacted and sweeping legislation will be scarce to non-existent. Instead, Washington will address fiscal deadlines with eleventh hour short term extensions, kicking the can down an abbreviated road.
Although such gridlock is frustrating to many American voters, it might be fine for the markets. Gridlock virtually eliminates the risk of major legislative changes, freeing the markets to focus less on Washington legislative policy and more on economic developments. Nonetheless, markets could be volatile through Election Day if portions of the media continue to assert that Democratic control of the House is possible.
A “Rigged Election”
In the third presidential debate, Trump declined to provide assurance that he would accept the election results, saying only “I will tell you at the time.” Trump’s refusal is consistent with pronouncements he has been making on the campaign trail. Since the release of theAccess Hollywood tape and the subsequent decline in his poll numbers, Trump has asserted with increasing frequently and forcefulness that the election is “rigged” against him. He posits a conspiracy working to deprive him – through voter fraud and other means -- of the presidency he otherwise would have won. At various times he has singled out as conspirators the media, the Democrats, minorities, the Republican Party "establishment," international bankers, the FBI, polling monitors, and the debate commission.
Given the tone of his rhetoric, it is hard to imagine Trump making a gracious concession speech and disappearing after the election (assuming he, in fact, does not prevail). His actions and temperament suggest that the unfairness of losing something he believes he rightfully won will gnaw at and motivate him to continue to seek the comforting support of his followers. Trump post-election is likely to continue to tweet observations, give interviews to friendly networks (and perhaps start his own), and even schedule the rallies he so enjoys.
The possibility of continued turmoil post-election could cause significant market volatility. American democracy relies on voters having confidence in election results. Questioning the legitimacy of a presidential transfer of power come Inauguration Day is unprecedented here. Yet Trump’s continued exhortations could engender resentment – and even sporadic outbursts of violence – on the part of some of his followers. Widespread doubt about the integrity of the election results would lead the country into uncharted territory, producing the sort of uncertainty that makes markets nervous. Thus, market volatility could continue even after Election Day.
Less important in the short term, but nonetheless meaningful for future elections, is the effect on the Republican Party of Trump’s continued crusade. The intra-party clash between Trump’s supporters and social conservatives is unlikely to disappear after the election. Conservatives will blame Trump for the election defeat, while Trump will blame the party establishment for abandoning his campaign. And the traditional free-market, pro-business, fiscal conservative wing will also vie for power. The ensuing fight could render the Republican Party a shambles, a situation that won’t be resolved quickly. While the disarray is unlikely to cost Republicans the House in 2018, it could prevent Republicans from taking control of the Senate in 2018 (when the numbers otherwise favor them).
Andrew H. Friedman is the principal of The Washington Update LLC and a former senior partner in a Washington, D.C. law firm. He and his colleague Jeff Bush speak regularly on legislative and regulatory developments and trends affecting investment, insurance, and retirement products. They may be reached at www.TheWashingtonUpdate.com.
The authors of this paper are not providing legal or tax advice as to the matters discussed herein. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. It is not intended as legal or tax advice and individuals may not rely upon it (including for purposes of avoiding tax penalties imposed by the IRS or state and local tax authorities). Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.
Copyright Andrew H. Friedman 2016. Reprinted by permission. All rights reserved.
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