November 3, 2016
Dynamic Commodities Exclusive
- So many ups and downs and shockers for two unpopular candidates
- Clinton’s lead declines after the late October surprise from the FBI
- The markets have shown their intentions for post-election direction
- Establishment versus Anger
- It’s close- What happens to markets if there is no clear winner on November 8
Before Friday, October 28 it appeared that Democrat, Hillary Clinton would cruise to an easy victory in the Presidential election on November 8 in the United States. However, many smart analysts warned against jumping to conclusions in the most contentious Presidential election in modern times.
A career politician in the spotlight for the past thirty years and her challenger, an outsider with little or no filter fended off competition to become the nominees of their respective political parties. The choice that the American voter faces on Tuesday, November 8 is clear, and it depends on where one stands on the political spectrum where they will cast their vote. Meanwhile, the nation goes into this election as divided as I have seen in my lifetime.
The polls have tightened to a level where there is little daylight, and in this election, few will be surprised with any outcome, but about half the nation and perhaps the world will be unhappy. When it comes to markets, these candidates offer very different visions for the political and economic future of the world’s largest economy. The ups and downs of the long and drawn-out campaign season have provided many clues as to how markets will react to either as the next President of the United States and leader of the free world. The one thing we have learned is not to discount anything when it comes to this election, particularly when it comes to our investment portfolios.
So many ups and downs and shockers for two unpopular candidates
The surprises started early in the Presidential election of 2016. Hillary Clinton’s challenger, a Democratic-Socialist from the state of Vermont Bernie Sanders, was given little or no chance to capture any support. However, he was able to build a cadre of support from the millennial generation who saw something in Sanders and almost succeeded in unseating the favorite, Clinton. If it were not for super delegates, committed before any popular vote, the nominating process could have easily gone to the Vermont Senator. In the end, he conceded, and Clinton received the nomination but not before negotiating to accept some of Sander’s campaign issues that include social, environmental and banking reform initiatives.
On the other side of the aisle, candidate Donald Trump developed a habit of sticking his foot in his mouth on a consistent basis. In debates against more than a dozen challengers, most who were Governors, Senators, and other establishment politicians, Trump was able to stand out and attract an angry Republican base with a populist message. He triumphed and rode into the convention with enough delegates to secure the nomination of a party that wanted no part of him and had to accept his rise to the top of the heap.
The tight race for Clinton and nomination of Trump were both surprises and the electorate braced for a wild three months of campaigning.
Clinton’s lead declines after the late October surprise from the FBI
With the field narrowed down to the last two standing, Clinton and Trump squared off in what has been the most bitter and mean-spirited campaign in modern history. The candidates emerged from their conventions close, but Clinton quickly took the lead in the race as a stumble at the first debate and some unsavory news about Trump’s past put the Republican on his heels.
Clinton rose to the top with a 12% lead in the polls at her peak, and the markets sensed victory for the establishment candidate. The dollar rallied, and stock prices remained near highs even as the central bank prepared the market for an interest rate hike by the end of the year. The bond market began to fall, but stocks shrugged off the move as the prospects for an administration that was not going to rock the boat too much after eight years of another Democrat in the White House gave markets a sense of consistency. Meanwhile, the prices of precious metals began to fall erasing some of the gains that came after the shocking results of the Brexit referendum.
The first debate went to Clinton, but the results of the second and third was not as clear as both candidates were able to hit talking points that rallied their bases of support. All the while, a consistent trickle of WikiLeaks releases caused Clinton’s support to erode. Finally, on Friday, October 28, the news that the FBI reopened its investigation of the former Secretary of State’s emails caused the polls to narrow to a point where there was little if any daylight between the two candidates. Now, with only a few days to go until the election, it is a dead heat and uncertainty reigns supreme.
The markets have shown their intentions for post-election direction
The differences between the policy proposals between the two candidates are as clear as day. After the election, markets will undergo a period of adjustment when it comes to policy initiative.
Even though the polls are virtually a dead heat, the markets have not learned much from the Brexit shocker in June. The markets continue to assume that Clinton will win and Trump will fade into memory. A Clinton election will likely cause a calm to fall over markets, but in the medium-term, it is probable that some areas of the market will move dramatically. In a Clinton administration, I see significant changes to which markets will have to adapt. First, another Democrat in the White House will mean a continuation of accommodative central bank policies. We are in the eighth year of historically low interest rates and another four years of a tightening cycle at a snail’s pace will be bullish for the price of gold and precious metals, albeit gradually. I expect gold to make a new high under a Clinton administration. I also believe the other commodities will increase as a longer period of easy money policies will result in higher inflation rates sooner rather than later.
A continuation of health care initiatives and government regulations will cause increasing pressure on drug companies, and the prices of many pharmaceutical companies will move lower. When it comes to energy, increasing regulations on oil and natural gas production in the United States will increase the cost of production and lower the nation’s energy output causing prices to rise. Finally, the dollar will continue to trade in a sideways range which will likely bolster the case for higher raw material prices. In the world of President Clinton II, we will likely see these changes occur gradually and over time. Of course, the first woman President will assume office under investigation by the FBI and any indictments or legal charges against the POTUS will cause uncertainty and a weak dollar. When it comes to foreign policy, expect a continuation of the Obama legacy.
A Trump Presidency will cause immediate shock and awe in markets. Gold will explode higher on the news and the dollar, stocks and bonds will likely move lower. However, I believe that a Trump administration would appoint fiscal conservatives to key posts that are disposed to increase rates. My best guess is that a Republican administration would mean a bear market for commodities, a renegotiation of all trade deals and protectionist fears followed by new agreements as the rest of the world depend on the consumer market in the United States.
Therefore, whoever wins on November 8, I believe that the stock market will go lower alongside bonds, at first. Gold, oil, and other commodities are likely to move higher over coming years if Clinton is President and lower under a Trump administration.
Establishment versus Anger
This election certainly has global ramifications, but it is the political temperature of the world that could foster the outcome. The rise of Trump is not only an American phenomenon; it is global. People all over the Western world are tired of establishment career politicians and have shown that they are willing to gamble with risky solutions. Brexit and other European election results are examples of public disdain for politicians.
The rise of Trump is the U.S. answer to anger versus the establishment. The problem is that whoever wins, that anger will persist as the political establishment has instilled fear of an outsider among their base of support and half the nation will view a Trump victory as a disaster of epic proportions. Anger and calls of a fixed election will follow a Clinton victory. A sweep by either the party where they get control of the Congress and White House will likely stoke even more bitterness in the months ahead.
The anger will not dissipate after this election; in fact, it may build to a crescendo.
It’s close- What happens to markets if there is no clear winner on November 8
The election of 2016 is very close, and there is no guaranty that we will get a definitive winner on election night. The election of 2000 took weeks to culminate in a victory for the Republican George Bush. Both sides are gearing up for the mother of all battles that could make the election, debates, TV ads and all of the talking heads look like child’s play if the election is thrown into the courts of Congress in the weeks ahead if neither candidate can get 270 electoral votes.
While many believe that the finality of November 8 will return markets and the country to a normal path, I disagree. I think that the volatility and uncertainty could increase on November 9 and continue far into the future because of the divisive nature of the campaign, the candidates and most importantly, their supporters.
Clinton and Trump both have one thing in common; neither has been able to attract a majority of support. They both have a secure base of 40% of the electorate. Bringing the country together is going to be the hardest job for the winner of this race and the loser is going to do little if anything to help. Put your financial helmet on and prepare for volatility. Do not count on anything when it comes to your money, even if your candidate prevails.
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