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베어링 인베스트먼트 인스티튜트
거시경제 및 지정학

Only 365 Days to Go!

2019년11월1일 - 3 분 읽기

Elections may be good for America, but this one won’t boost stocks.

They are far too expensive and long, but this U.S. presidential election now has just one year to go. While it is too soon to pick a likely winner⁠—let alone assess what the vote means for the country's mood or world's prospects⁠—it’s hard to see how any outcome will be good for the narrower interests of the stock market.

A combination of lower interest rates, Chinese recovery and resilient U.S. consumer demand could yet drive stocks to new highs over the next 12 months. But it won't get any help from the Democratic presidential candidates or the incumbent Republican.

Campaign platforms should not be taken too literally before they confront the reality of Washington lobbying and budget stress. Recent market swoons have been linked to some of the more extreme ideas of Massachusetts Senator Elizabeth Warren as her poll numbers rise, but few of her plans stand a chance of making it into law without significant dilution. Still, it’s increasingly clear that almost any outcome from Vermont Senator Bernie Sanders to Donald Trump will lead to an erosion of corporate earnings through some combination of higher taxes or tariffs and tougher regulation or competition policy.

Depending on your views, these initiatives may advance fairness, freedom or growth. But they won’t do much for the S&P 500.

"[A]lmost any outcome from Vermont Senator Bernie Sanders to Donald Trump will lead to an erosion of corporate earnings through some combination of higher taxes or tariffs and tougher regulation or competition policy."

No matter who takes the oath on Inauguration Day in January 2021, even lavish spending plans will have to be offset by higher taxes given the parlous state of the budget. Monetary policy probably won’t change much even if Jerome Powell is replaced. But government pressures on corporate behavior and profits will inevitably grow. 

First, a little history on the market in election years. On average, there are few reliable patterns about how stocks or bonds perform during these quadrennial events (Figure 1). Similarly, Moody’s Analytics finds it's hard to link the handwringing over election-year uncertainty with either worse stock performance or slower growth.

figure 1: U.S. STOCK (AVERAGE ELECTION YEAR 1980–2016)

Source: Bloomberg as of November 1, 2019.

This time, in fact, there may be a lot less uncertainty than meets the eye. And that’s just the problem for stocks. 

President Trump and his Democratic challengers are all riding a wave of dissatisfaction and a growing sense that rich, mostly coastal elites have benefitted unfairly and the system the president himself still labels “rigged.” 

The broader economic story for the last several decades is that returns to capital have been rising while returns to labor have not. A recent rebound may represent typically higher wages at the end of an economic cycle, but the secular trend has been lower for the last five decades (Figure 2). Income inequality and wealth disparities have been growing, too.

The causes include automation that replaces jobs, globalization that keeps wages low and labor unions whose political clout has waned. Many economists also point a finger at tax policy that is often shaped more by lobbying and campaign contributions than concerns for fairness and productivity.

figure 2: SHARE OF NATIONAL INCOME GOING TO WORKERS

Source: Bloomberg as of November 1, 2019.

In many industries, the decline in competitive pressures has made things worse. While the world of tech startups remains innovative and hyper-competitive, our recent Barings Investment Institute White Paper highlights the durable advantages of firms that lodge themselves into the economy’s deeper infrastructure⁠—the Googles, Facebooks and Amazons. They and other enterprises such as airlines and telecommunications providers also benefit from competition rules that still struggle to keep up with change.

The result skews division of spoils still further. Studies show that U.S. households pay at least double European prices for internet service. Meanwhile, by one estimate, American families pay $300 more per month on goods and services than they would have with the competitive pressures that existed 20 years ago. 

Weak competition also means profits can be funneled into share buybacks and dividends since firms are under less pressure to invest in innovation. Fixed asset investment suffers and economic growth slows.

Political pressures build, too. The one thing Barack Obama and Donald Trump share is that they came to power as "change" candidates. Change is clearly what the Democrats mean as they decry rising levels of inequality. Their most extreme plans are unlikely to become law, but a winning Democrat will try to nudge policy toward more spending on social services and higher taxes. He or she will propose much more muscular regulation of anti-competitive behavior.

What is ironic, perhaps, is that the Republican candidate and incumbent president will be digging into corporate profits, too, if from different angles. In spite of his signature tax cuts of 2017, the president's tariffs have exacted a direct tax on importers and their customers. While he touts the regulations his administration has cut, he has introduced fresh business uncertainty with threats of further tariffs and sanctions against China and Europe which will hardly subside in a second term. 

If re-elected, there will likely be further efforts to cut drug prices, regulate technology giants and brow-beat any firm that’s even thinking about relocating a plant to Mexico. He may now be the “continuity” candidate, but he doesn’t bring much predictability to corporate America.

Thus, this modest prediction. Amid the inevitable silliness and pettiness of campaigning, the debate will grapple somehow with themes around fairness and growth. Most of the ideas on the table will involve greater government influence in corporate behavior and, all else equal, lower profits and stocks.

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