October 16, 2016

November elections will not be good news for the markets

In light of the news over the last week, the odds of a Clinton presidential win have risen considerably according to the London betting parlors.

At Paddy Power, Clinton's odds have improved further to 1-6 odds as Trump's odds have eroded to 5-1. In other words, if this was a horse race the race track likely would take no win bets (and take it off the board) because it is a near-guarantee that Clinton will be the next president of the United States.

My baseline election expectations remain:

* A Clinton presidency

* The Democrats regain the Senate

* The Republicans retain the House of Representatives

As I wrote previously:

"A Clinton presidency will likely produce fiscal (legislative) gridlock (Democratic control of the Senate and Republican control of the House) and inertia at a time in which monetary policy has lost its effectiveness. There will simply be too much animosity between the parties to assure compromise following such a heated campaign that has been filled with personal and party attacks on the part of both Republicans and Democrats.

A Trump presidency will likely produce a broad swath of uncertainty as it related to ambiguities and the absence of details of policy. As well, passage of Trump initiatives could prove too debt-heavy and hard to legislate, with opposition outside and even within the Republican Party.

From my perch, both outcomes are market-unfriendly, have not been priced into the markets, will produce additional uncertainties and ultimately might lead to a contraction in valuations."

We must get fiscal.

With monetary policy losing its effectiveness, after the election and in early 2017, everything will come down to how smoothly and successfully a Clinton administration is capable of negotiating toward fiscal policy compromises with a Republican House led by Paul Ryan.

Indeed, a successful baton pass from stimulative monetary policy to a substantive expansion in fiscal policy might hold the single most-important key to the stock market outlook next year.

Unfortunately, given the increasingly vocal and hostile right wing of the Republican Party, I am not very optimistic.

Ergo, the November election will not likely be market-friendly and could provide another important headwind to equities.