Take Five with Greg Valliere: Will the presidential campaign offer more substance?

Political strategist Greg Valliere has nearly 40 years of experience following Washington issues for institutional and retail investors, and the 2016 presidential campaign is the “nastiest” and “most unserious” he’s ever witnessed. Valliere, who visited Madison last week, is now chief global strategist at Horizon Investments and specializes in coverage of the Federal Reserve, tax and spending issues, and politics. In Part I of our “Take Five” interview, he discussed the election outcome that’s most likely to result on market stability. Here are excerpts from our talk.

IB: Do you hold out any hope that the presidential campaign will become more content-rich as Election Day (Nov. 8) approaches?

Valliere: A little hope, dim hope. The real serious issues are accompanied by painful prescriptions. If you really want to tackle deficit reduction, for example, there is going to have to be some pain. Neither Hillary Clinton nor Donald Trump talks about the serious issues. I think the debates will be quite combative because that’s where they are making headlines and insulting each other rather than engaging in serious issues. It’s possible that there will be a serious exchange on some issues but this campaign has been largely devoid of the kind of substance the voters would like to see.

IB: Even with the polls tightening, I still think the race is Hillary Clinton’s to lose. But she appears to be perfectly capable of losing it. What’s your take on who has the upper hand?

Valliere: Trump has had the momentum in early September and he’s probably leveled off. After a very bad stretch with her health issue, Hillary Clinton is still a very slight favorite. It could be a cliffhanger and in fact I know some people who think it could wind up 269 to 269 on the Electoral College map. It could be that close but if there is one sleeper issue, it’s what I would call the ground game. She has a first-rate campaign operation in all the key states and Trump has been late to put an organization together. In many states amateurs or novices run his operation, and they are not well funded. The ground game could be a significant plus for her.

IB: That would certainly make up for the purported enthusiasm gap that she has compared to Trump’s supporters.

Valliere: You hit on something crucial and that’s turnout. Let’s say it’s windy and raining in Columbus, Ohio on Election Day. Will the young people who still would prefer Bernie Sanders go out and vote for her? I don’t think they are going to vote for Trump but they may not vote.

IB: Another worry she has is the appeal to younger voters, or Bernie Sanders supporters of the Libertarian and Green Party candidates, Gary Johnson and Jill Stein, respectively. They appear to be taking more votes away from her than from Trump.

Valliere: Certainly some of Jill Stein’s support is exclusively people who support Sanders who would not be inclined to vote for her [Hillary]. She might be losing a point or two there. As for Gary Johnson, I’ve seen analysis where Johnson probably hurts her more but that’s a close call.

IB: People forget that in 2000, Ralph Nader only got two percent of the vote nationally, but that was enough to prevent Al Gore getting more of a margin in the popular vote and those 25 electoral votes in Florida decided the election.

Valliere: When you look at Florida [where a recount determined the winner], Nader got something like 2.1% there, and that was enough to throw the presidency to George W. Bush [who won the popular vote in Florida by just 543 votes].

IB: In terms of who occupies the White House and who controls Congress, what’s the best scenario for market stability? For example, would it be Clinton winning the presidential election but Republicans maintaining control of both houses of Congress, or another scenario? What would be the best result for my 401(k)?

Valliere: If that were your only consideration, I’d say the scenario you cited, with Hillary Clinton winning but both houses staying Republican. That’s one the markets have historically lived with, and very happily.

IB: Is that because both parties have to play ball within the 40-yard lines?

Valliere: Yes, and I think that her more aggressive proposals, such as significant tax increases for the wealthy, would die in the House of Representatives. The Republican House is not inclined to endorse any kind of tax increase. Her agenda would be thwarted and investors traditionally like that combination because the markets have traditionally enjoyed divided government.

(Continued)

IB: In the same vein, we had Democrats in control the presidency and both houses of Congress in 2009–10, and beginning in March of 2009 the stock market has done began improving because of the steps taken to revive the economy.

Valliere: Well, there were so many other variables. Monetary policy was aggressively accommodated during the period you cited. Also, the markets were so low. When you look at where the stock market was in the spring of 2009, there was ample room to rally from an exceptionally low base. The monetary policy was and usually is a very significant factor.

IB: In your view, which presidential outcome would cause the most uncertainty, perhaps even volatility?

Valliere: Well, a Trump victory … or you could say a Hillary Clinton victory with both houses going to the Democrats. That would concern the markets about major tax increases. Conversely, a Trump victory with Republicans controlling both houses would create some anxiety about a trade war with China. There would be anxiety about Trump’s relationship with Janet Yellen and the Fed, so there would be concerns on both fronts, in my opinion.

If it looks like Trump is going to win, there might be some anxiety about a dispute with China on trade and he’s made it quite clear. I’d say his call for tariffs and sanctions against the Chinese would unsettle the markets. That’s a concern.

IB: Is the tax concern related to the timing of a tax increase, especially with economic growth apparently slowing down to less than 2% this year, based on the tepid growth of the first two quarters?

Valliere: Yeah, it might weaken the economy to have a big tax increase. There are an awful lot of people in the markets who worry that Hillary Clinton does not have a pro-growth agenda. I think she would continue to rely heavily on regulations, and I think she would like to see taxes go up on corporations and wealthy individuals. There is a growing consensus in the markets that tax reform and maybe some tax reductions would be very healthy for the markets.

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