We were bored for seven months (the SP 500 is on the same levels as in April, which are the same as for all of 2015 with the exception of August) but for the next few months and perhaps years the show is guaranteed. On the one hand, monetary policies are about to give way to fiscal policies, on the other, fiscal policies themselves are about to be governed by untested homines novi (Trump and the new Congress) or, alternatively, by a system that will paralyzed by a constitutional crisis that promises to be large.
As always, the path that America takes will ultimately be the path that we too will take in Europe after some time. This was the case with monetary policies, it will also be the same with fiscal policies. We will see how ready the markets are for these new scenarios starting next week. Let's start with politics. If Clinton is going to be president, she won't be by enough consensus to take Congress with her. Now it is true that the markets like shared power (executive for Democrats and legislative for Republicans), but it is equally true that, this time, the two powers will not ignore each other, as has been the case in recent years, but will fight bitterly against each other.
Possible irregularities related to the Clinton Foundation, in addition to the already well-known line of classified documents, have a high probability of resulting in indictment and, in the future, in an impeachment procedure by Congress. Obama has until the end of January to grant Clinton a presidential pardon. If Trump wins the election, the pardon will not be particularly controversial. If Clinton wins them instead, the pardon by an outgoing president like Obama will be extremely unpopular. In fact, the practice is for the incoming president, who has just been legitimized by the popular vote, to pardon the outgoing one, not the other way around.
Ford forgave his predecessor Nixon, just as Putin forgave Yeltsin in Russia. Clinton, once president, could even forgive herself, but it is easy to imagine the political price that she would have to pay. Trump's victory, on the other hand, would certainly open a new page, but full of unknowns. There is the precedent of Reagan, who won the 1980 election with a spectacular comeback in the seven days leading up to the vote. Reagan, during the electoral campaign, had been criticized as an unlikely actor, with an even more improbable hairdo, who harbored warmongering paranoia and crypto-fascist instincts in his rare moments of lucidity.
In reality, Reagan, while working only half a day and spending the rest of the time on horseback on his ranch, ended the Cold War and brought America from stagflation to economic boom. Sure, Reagan had the top-level ideological and political collaboration of the neocons (Democrats who had trained in the Leo Strauss school of philosophy before moving on to a completely revamped republicanism), but the neocons, who did very good things under Reagan, did highly questionable under the two Bushes.
What is often forgotten is that it took Wall Street two years to accept Reagan. The stock dropped 20 percent after his election before climbing 145 percent over the next six years. The purgatory of the first two years was due to rate hikes by Volcker's Fed not sufficiently balanced by expansionary fiscal policies. Trump would have less leeway than Reagan. He would find himself starting with an already high public debt and a rate hike would immediately impact the deficit. As for the stock market, Regan found it at rock-bottom levels, while today we are at all-time highs. Trump himself, for more than a year, has been issuing warnings about the stock market being too high.
Trump passes for a spendthrift who would explode, as happened to Reagan, the public deficit. However, two things are overlooked. The first is that Trump on the one hand announces that he wants to lower taxes but on the other he doesn't stop denouncing America's high debt level. The second is that Trump chose the unspectacular Pence as deputy not only to secure the vote of evangelicals, but also because in Pence, Indiana, he managed to lower taxes, increase social spending and at the same time win applause. of the rating agencies for the financial recovery achieved.
The markets, at this point, find themselves at a crossroads between two difficult roads. On the one hand, with Clinton, the continuation of the current monetary policies in an increasingly tired version and the impossibility of implementing seriously expansive fiscal policies for the opposition Congress. On the other hand, a Trump for whom it is difficult, if not impossible to take measures and who should struggle a lot to overcome not only the tough Democratic opposition, but also the divisions between Republicans. It is useless to deny it, the equity markets have more room to go down than to go up, at least in the coming months. The periods of transition from one administration to another are always delicate, especially when the administrations have had a long duration and have left a mark.
Reagan, Clinton, Bush Jr., and Obama have all served two terms. If they were re-elected after the first four years it is because the economy was starting to do well and because a complacent Fed had been slow to raise rates each time and tolerated the formation of bubbles. It may be a combination, but the stock market crashes of 1987, 2000 and 2008 occurred at the end of the second term of successful administrations, a success all too rewarded by the markets. The positive aspect is that this time there are, at least for now, no elements to think about heavy corrections. At this particular moment, the United States, Europe and China are doing quite well, while the central banks of Europe, Japan and the United Kingdom are preparing to withdraw another two trillion securities from the market over the next 12 months.
Even if America were to have time to produce half a trillion more deficit of fiscal expansion, the net effect would still be one and a half trillion bonds taken out of circulation, with a beneficial effect on the price of all the others. The prudence we recommend, on the other hand, is above all aimed at equities and credits. High-quality bonds, even in a medium-term context of rising interest rates, will in fact have surprising positive flare-ups in moments of equity correction. As for the dollar, not much would change under Clinton. With Trump, even in this case, everything would become possible. The combination of rising rates and expansionary fiscal policy led, under Reagan, to a very strong rise in the dollar (which, however, started from depressed levels). However, the desire to renegotiate trade relations with the rest of the world could induce Trump to use the dollar, weakening it, as a weapon of pressure.
