With Donald Trump’s decisive victory in Indiana last night, and Hillary Clinton looking like she will be the inevitable Democratic nominee, we finally know the November presidential match-up.
The occupant of the Oval Office gets way too much credit during good times and way too much blame during bad times. George H. W. Bush and Jimmy Carter were both tossed out amid public perceptions of their poor economic stewardship. When Carter came into office, inflation was building to a record high and a surge in oil prices caused by an embargo was having its pernicious effect. Consider that as Bush was on his way to losing his re-election in 1992, the economy was already recovering from the 1990-91 recession, and was on its way to some of the strongest growth since World War II. Voters failed to see this, and they then probably gave Bill Clinton too much credit for the economic rebound when he ran for re-election in 1996.
But I don’t want to suggest that presidents are not and cannot be significant. There are times where specific presidential actions and policies have far-reaching consequences, leading to outcomes that can be positive or negative. Consider these recent examples:
- Ronald Reagan’s tax cuts and government spending were enormously stimulative, helping fuel economic growth and lifting the stock market. But his fiscal policies also created huge deficits, and helped to accelerate income inequality. Oh, and he appointed Alan Greenspan as Federal Reserve chairman (whatever your own thoughts are about “the maestro,” we cannot claim this was an inconsequential appointment).
- Clinton raised taxes, balanced the budget and reformed welfare, all of which had an impact on markets. He also signed off on the repeal of an important part of the Glass-Steagall Act, which separated commercial and investment banking, and the Commodity Futures Modernization Act, which limited regulation of certain derivatives. Both laws played a role in intensifying the financial crisis.
- George W. Bush passed large tax cuts, stimulating the economy but also adding to the federal deficit. He spent $3 trillion invading the wrong country after the 9/11 attack, digging the fiscal hole deeper. His appointees to federal agencies and departments advocated policies that contributed to the credit crisis.
- Barack Obama passed the Affordable Care Act, which had a huge impact on the heath-care market. His 2009 economic stimulus plan in response to the Great Recession stimulus has been criticized as too small, leading to a mediocre recovery. The impact of the Dodd-Frank Act on Wall Street has been broad and may be contributing to a decline in financial industry profitability.
Given this, it would be foolish to suggest that presidents are not potentially important to the economy or markets. It’s just that the U.S economy is so large and markets so good at discounting future cash flows that anything a president does will run into countervailing forces.
But as our examples above show, presidents can have an impact, for better or worse.
How could this shake out in a Clinton-Trump election? Let’s set aside national security and terrorism, and only consider the legislative agenda that might have a significant impact on the economy and markets.
Trade: There is a difference between the two candidates. Trump wants to roll back the North American Free Trade Act and block the unratified Trans-Pacific Partnership. Clinton supported Nafta and initially backed the TPP, but she now seems to have changed her mind.
Taxes: There are wide differences between these two on tax policy. Trump wants tax cuts for the wealthy while Clinton seems to favor raising them.
Capital Repatriation/Tax Holiday: Both candidates support some form of “tax holiday” to bring the $2 trillion or so of offshore corporate profits stashed overseas back to the U.S. But the devil is always in the details, and the specifics will matter a great deal.
Infrastructure: Not counting the wall that Trump wants at the U.S.-Mexico border, both seem to favor spending on infrastructure.
Appointees: Each candidate is likely to appoint very different people to key positions at the Supreme Court, the Securities and Exchange Commission, the Federal Reserve and other important agencies. Their staff advisers are likely to be very different as well.
Much of the above requires the cooperation of Congress, something that can’t be guaranteed based on recent history.
So while the winner in November will be consequential to markets and the economy, he or she might be less so than many voters and investors imagine.