August 2016

Elections Effect on the Market – Hillary verse Trump

• Hillary Clinton Overview
• Donald Trump Overview
• Likely scenario
• Our investment position

With the upcoming election many people are wondering what the effect on the market will be if there is a Trump president verse a Hillary. There will definitely be clear winners and clear losers’ depending based on the campaign promises made.

Hillary Clinton

Hillary has promised to keep continuity of policies where Obama left off. A stable and familiar policy is positive for the overall market. Investment into companies and the economy doesn’t happen when there are large policy unknowns.

The effect on the deficit based on campaign policies actually show Hillary spending less than Trump who has promised many changes, the main being a business tax rate of 15% . This if enacted would reduce tax revenue to the US by 10.14 trillion over the next decade. Hillary will create less of a deficit than Trump which will put downward pressure on yields, and strengthen the USD making US bonds a better investment.

The Biotech sector is the main industry in the crosshairs. A large campaign promise surrounds dealing with skyrocketing out-of-pocket health costs, and particularly runaway prescription drug prices . The biotech sector which relies on high drug prices to earn margin after going through a costly, unpredictable and long approval process will be hurt.

In the short run service industries and retailers who benefit from a low minimum wage will struggle if Hillary enacts her plan to raise minimum wage because it will take time to pass the costs onto consumers. While this disconnect exists profitability margins of these companies will erode.

For Alberta Hillary will continue to hold the same opinion as Obama regarding the Keystone pipeline which is to not approve. This is negative for Alberta.

Positives: Overall Economy, Bonds, Renewable Energy, Hospitals and Healthcare, Infrastructure, USD
Negatives: Biotech, Energy, Consumer Discretionary, Utilities, Alberta

Donald Trump

Donald Trump if elected president without a doubt adds more volatility to the market. He has several controversial plans that will add significant uncertainty such as reneging on free trade agreements, the Mexico wall and the deportation of all illegal immigrants. The uncertainty of these plans along with the increased deficit that Trump would incur by cutting the corporate tax rate to 15% will put upward pressure on bond yields which lowers bond values and downward pressure on the USD.

Negating free trade and penalizing counties with tariffs could start a trade war which in today’s interconnected global market would crush most of the S&P500 companies. The largest target for Trump is China which could respond negatively to his rhetoric. Apple the largest US company by market cap produces most of its product in China and also derives 25.1% of its revenue. If China was to retaliate against the US and cut off access to their market Apples share price would plunge along with all other companies who have a China footprint.

Trump also has proposed a 35% tariff tax on manufactured goods. Simply put this would bring back some jobs but it would in most cases just increase the price of items to consumers by 35%. This type of steep price increase would decimate consumer spending which is the largest driver of the US economy.

Lastly, deporting all undocumented immigrants is impossible but the numbers behind it show it would cost $400 billion to $600 billion in costs to simply address. The loss of the 11 million workers on productivity would reduce real GDP of the US by $1.55 trillion. Just this equates to a real GDP decrease of 5.7% compared a decrease of 3.4% incurred by the effects of the 2008 recession.

Gold thrives in times of a weakening USD and market volatility. It is predicted gold will increase if trump is elected. Other materials which are priced in USD will also benefit from a weaker USD.

Trump favors a tax holiday for corporations holding significant cash overseas. This would immediately benefit any corporation that has huge trapped cash on their balance sheet. Most notably would be large cap tech companies such as Apple, Microsoft and Google

For Alberta Trump would be positive. He has indicated that he would approve the Keystone pipeline . This would increase Alberta’s access to the US market and decrease transport cost which would help close the gap between the price of WTI (Most quoted price of oil) and the lower dollar amount Alberta producers receive for their oil. It would be a stimulus for Alberta.

Positives: Energy, Gold and Materials, Tech with overseas cash, Defense & Industrials, Infrastructure, Alberta
Negatives: Overall Economy, Consumer Staples who rely on immigrant labour, USD, Bonds

Likely Scenario

As always with politics, it is important to keep into mind that several policy stances said on the campaign trail are either impossible to enact or will be dumbed down to get approved through congress. It is likely that the gridlock that exists in present day will continue to exist.

Republicans control congress so Hillary won’t be able to pass a huge minimum wage increase or legislation to significantly harm the biotech industry. It is general consensus she will continue along the current path with little unchanged from the way it is today.

Trump with all his rhetoric which might be slightly damaging with trade partners like China. However, he won’t be able to enact any major policy change even with a republican controlled congress. Many of the members won’t follow him into the economic proposals discussed above. Likely there will be a short term decrease in markets tied to increased uncertainty but the effect might be overall net positive due to a more business friendly attitude and increased government spending.

Our Position

Whatever happens in the US election we will hold a balance of diverse investments that will aim to keep your portfolio stable. It is not our job to bet on who will win the election but to position your portfolio to prosper no matter what the outcome is.

This newsletter was prepared solely by Bruce Morrison who is a registered representative of HollisWealth™ (a division of Scotia Capital Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada). The view and opinions, including any recommendations, expressed in newsletter are those of Bruce Morrison only and not those of HollisWealth. TM Trademark of The Bank of Nova Scotia, used under license. Morrison & Partners Wealth Strategies is a personal trade name of Bruce Morrison.