US ELECTION

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US ELECTION

SPECIAL REPORT

COMPLIMENTS OF


Compliments of FOREX.com

US Election 2016 Special Report

The seemingly never-ending spectacle that is the US presidential election campaign is entering its final

act. By the end of the night on November 8th, either Hillary Clinton or Donald Trump will become the new

president-elect of the world’s largest economy. While it seems like the media has dissected every aspect

of the upcoming election, from email servers to hand sizes, comparatively little ink has been spilled about

how election could affect global asset markets.

This special report seeks fill in those gaps. In the following sections, we provide an overview of the US

election process and timeline; a look at a couple of the candidates’ most market-moving economic

policies; and an examination of how markets have historically reacted under different political regimes,

including actionable takeaways to use in your own trading.

Trump vs Clinton

Even relative to the divisive political environment of the past few years, the 2016 US election is on track to

be the most contentious and vitriolic campaigns in memory. After a surprisingly highly-contested primary

season, the liberal Democratic party nominated Hillary Clinton, wife of former US President Bill Clinton,

while the conservative Republican party selected businessman Donald Trump as its candidate.

In an effort to sway voters across the country, the two candidates will now engage in a series of televised

debates, in addition to their constant schedule of rally speeches. Important dates for the election can be

seen below:

26 04 09 19 08

SEPT OCT OCT

OCT

NOV

First Presidential

Debate

Vice Presidential

Debate

Second Presidential

Debate

Third Presidential

Debate

Election Day*

(Hempstead, NY)

(Farmville, VA)

(St. Louis, MO)

(Las Vegas, NV)

* Note that many states allow early voting starting as soon as September 23. The share of ballots cast early has been rising in

recent years, hitting a record high of 35% of the total votes in 2012, and early votes are projected to have a big impact on this year’s

election as well.

US Election 2016 Special Report

Matt Weller, CFA, CMT

Senior Market Analyst, Faraday Research

1


Compliments of FOREX.com

What do polls say?

Opinion polls have been relatively close throughout the national campaigns,

with both parties receiving a slight bump after their respective conventions. As

of writing in late September, polls have been tightening to a near coin-toss.

According to poll aggregator Real Clear Politics, Clinton is currently polling at

44.9% nationally vs. 44.0% for Trump and the situation remains highly fluid:

Source: Real Clear Politics (September 19 2016). See real-time aggregated polls at RealClearPolitics.com.

US Election 2016 Special Report

Matt Weller, CFA, CMT

Senior Market Analyst, Faraday Research

2


Compliments of FOREX.com

We’re traders, not political pundits, so we won’t try to handicap the likelihood of

each outcome. As of writing in late September, overseas bookmakers are giving

Hillary Clinton a 60/40 chance of winning the election come November 8th. The

experts at the election forecasting site FiveThirtyEight.com generally agree that

these odds are accurate. Based on the website’s “Polls-only” model, Editor in

Chief Nate Silver and company currently give a very slight edge to Hillary Clinton,

though that forecast will of course change as new polls come in:

Source: Five Thirty Eight

(September 19 2016). See

real-time model forecasts

at FiveThirtyEight.com

US Election 2016 Special Report

Matt Weller, CFA, CMT

Senior Market Analyst, Faraday Research

3


Compliments of FOREX.com

Presidential policy and its impact on markets

It’s worth noting that in addition to the headline-grabbing presidential election, all US

Senate seats and a third of the members of the House of Representatives will be up

for grabs. As we’ve seen over the past few years, it’s difficult for the president to push

through an agenda without the support of the legislative branch. Both the Senate

and House of Representatives are currently controlled by the Republican party, but

Democrats could take the Senate with a strong showing in November.

Keep in mind that many presidential policies would still have to

garner support from Congress before being ratified into law, so

the congressional elections will be nearly as important as the

Presidential vote.

With that important disclaimer out of the way, it’s obvious the eventual president’s

policies will be a key driver for markets. At a top level, investors view Hillary Clinton as

the “continuity candidate.” This means that, if elected, her policies would make only

relatively moderate changes to existing policy. By contrast, many of Donald Trump’s

economic policies haven’t been entirely fleshed out, but will likely be focused around

large tax cuts and aggressive renegotiation of international trade treaties.

Below, we highlight a couple of the most important economic issues on which Clinton

and Trump differ, as well as the possible implications for specific markets:

Taxes: Which candidates’ policies are best for

stock and bond investors?

Toeing the party line, Clinton proposes a modest tax cut for the middle class,

paid for by raising taxes on individuals making more than $5M/year and

increasing capital gains taxes on those earning above $400k/year. In our

estimation, these changes would have little net impact on the national deficit,

and by extension, the status quo in major asset classes.

US Election 2016 Special Report

Matt Weller, CFA, CMT

Senior Market Analyst, Faraday Research

4


Compliments of FOREX.com

Therefore, a Clinton presidency would be unlikely to provide any additional boost to US

stocks, but bond investors may benefit from interest rates remaining lower for longer.

By contrast, Trump has proposed an across-the-board $4.4T tax cut,

combined with a boost to infrastructure and defense spending, as well as

a desire to gradually pay down the national debt. To say the least, it would

be difficult to pursue all of these goals simultaneously, and we suspect that

a President Trump would fall more in line with the Republican orthodoxy if

elected president. In the short term, this would likely take the form of tax cuts

for the rich and an expansion in the deficit, unless accompanied by a dramatic

cut in domestic spending.

Economics 101 tells us that deficit spending can provide a short-term boost

for the economy, and therefore, equity markets, though that could be offset by

long-term concerns about the sustainability of the national debt.

In terms of immediate impact, a Trump presidency could

provide a boost to US stocks, though interest rates may rise as

traders fear an expansion of the deficit.

International trade: Big implications for Mexico and China

Both candidates have courted blue collar manufacturing workers by proposing

to renegotiate international trade deals, but Trump has been more consistent

on this front. He has formally pledged to renegotiate NAFTA, label China a

currency manipulator, and of course, build a wall with along the Mexican

border.

There is no debating that international trade can hurt certain sectors of the

domestic economy, but done right, it can be a net benefit for all countries

involved. Not surprisingly, the international ramifications of Trump’s hard-line

stance on trade have already started to manifest in the FX market. As Trump’s

polls have improved in recent weeks, the currencies of Mexico and China have

both fallen on fears about the potential for a less accommodative trade policy

from the world’s largest economy.

US Election 2016 Special Report

Matt Weller, CFA, CMT

Senior Market Analyst, Faraday Research

5


Compliments of FOREX.com

With opinion polls currently showing a near toss-up between Clinton and

Trump, the outcome of the US election will remain one of the most important

drivers for the peso and yuan.

If it starts to look like Donald Trump will be taking the oath of office,

traders will look to sell both the MXN and CNH and ask questions later.

By contrast, emerging market currencies as a whole could see a big relief

rally if Clinton is elected.

In the equity market, Trump’s protectionist policies would likely favor small cap

stocks, which are more dependent on the domestic economy, at the expense

of large multinational companies.

Energy: Potential for a 1M barrel/day swing in US oil production

The two candidates also have dramatically different views on energy policy.

Clinton has publicly stated her goal to have renewable energy “power every

home in America within 10 years” and cut oil consumption by a third. Trump

meanwhile promises to revive the fossil-fuel sector, including by eliminating

onerous regulations on the industry.

It doesn’t take a genius to realize that the election’s outcome will have a

massive impact on US oil production. Analysts have estimated that US

production could fall by as much as 500k barrels a day if Clinton has her way,

whereas Trump’s policies could increase production by a similar amount.

At the most basic level, a Clinton-induced decrease in oil production

could push oil prices higher, whereas a Trump-led renaissance in oil

supply would likely push oil prices down, though it’s worth noting that

other geopolitical factors, including OPEC’s output, could overwhelm the

impact of US politics.

US Election 2016 Special Report

Matt Weller, CFA, CMT

Senior Market Analyst, Faraday Research

6


Compliments of FOREX.com

The Federal Reserve: Buck’s near-term fate intertwined with Yellen’s

Arguably the most significant impact of the US presidency on global economic

policy will be from the choice of the Fed Chair. Hillary Clinton’s campaign has

said that it would like to increase the diversity within the Fed (read: fewer

white, male bankers as Fed governors). That said, Clinton would be likely to

reappoint current Chairwoman Janet Yellen (or perhaps current Fed Governor

Lael Brainard, who is even more dovish); one way or another, a Clinton

presidency would likely ensure that doves rule the Fed roost.

Trump, on the other hand, has a muddled public record when it comes to Dr.

Yellen. In the past, he’s said both that he has great respect for her, but his

comments of late have been far more critical, stating that Yellen should be

ashamed of herself and that she’s leaving interest rates low to benefit Obama.

At this point, it seems unlikely that Yellen would serve a second term under a

President Trump, and her replacement would likely be more hawkish.

As for the short-term impact on the US dollar, expectations

of a more hawkish Fed chair under a President Trump could

provide a near-term boost to the US dollar. In contrast,

continued dovishness from the world’s most important central

bank would likely serve as a headwind for the greenback under

Hillary Clinton.

Market Cycles: What political patterns have we seen historically?

At Faraday Investment Research, we pride ourselves on basing all of our

trading decisions on time-tested techniques. In that vein, we wanted to take

a look at the track record of major markets and some of the cycles that have

emerged in recent years:

US Election 2016 Special Report

Matt Weller, CFA, CMT

Senior Market Analyst, Faraday Research

7


Compliments of FOREX.com

Which party is best for the stock market?

We’re not the first to ask this loaded question. Looking at the historical record

first, it’s clear that the US stock market has seen higher gains under Democratic

presidents: since 1945, the stock market’s average annual return was 9.7% with

a Democrat in the White House, versus a 6.7% average return under Republicans.

Source: S&P Capital IQ

Before Democrats take a victory lap though, there are a couple of big disclaimers.

First, it’s worth noting that this performance has hardly been uniform; in fact, the

best stock market performance by president in the sample was under Republican

President Gerald Ford, who oversaw an average return of 18.6% per year on

the S&P 500. Furthermore, the stock market has seen its highest returns with a

Republican-controlled Congress.

US Election 2016 Special Report

Matt Weller, CFA, CMT

Senior Market Analyst, Faraday Research

8


Compliments of FOREX.com

Frankly, we’d caution readers against making any meaningful changes to

their investment plans as a result of the election. The sample size on this

data is relatively small (only 12 presidents since 1945) and the impact of the

president’s political party on the $18T US economy is often overplayed.

The US dollar bleeds blue

The world’s reserve currency has also shown a preference for Democratic presidents, at least over the

last couple of decades. Dating back to President George H.W. Bush in 1988, the US dollar index has

tended to fall during Republican presidencies and rise under Democrats, including over the last eight

years under Obama:

Source: TradingEconomics.

com, Faraday Investment

Research

Once again, readers should note that there are far more important macroeconomic factors that could

upset this historical tendency and sample size here is extremely small.

US Election 2016 Special Report

Matt Weller, CFA, CMT

Senior Market Analyst, Faraday Research

9


Compliments of FOREX.com

EUR/USD: Will the “mid-term cycle” return?

The last historical pattern to be aware of is the so-called “mid-term” cycle in EUR/USD. As the chart below

shows, EUR/USD has shown a tendency to rise in the first half of the 2-year mid-term elections (November

of even-numbered years to November of odd-numbered years) and fall in the second half:

Source: Stockharts.com, Faraday Investment Research

Unfortunately, this cycle did not manifest over the last two years. Instead, EUR/USD has been trapped

in stasis between 1.05 and 1.15 for nearly two years now. Traders should keep a close eye to see if the

previously-reliable mid-term cycle in EUR/USD shows signs of resuming after the elections.

As this report shows, the 2016 US election will have big implications across the stock, bond, commodity

and FX markets. Regardless of what the US election brings, the global team of expert analysts at Faraday

Investment Research will continue to identify real-time trade opportunities on a daily basis. Head on over

to our website to check out our services and see how we can help you improve your trading today!

US Election 2016 Special Report

Matt Weller, CFA, CMT

Senior Market Analyst, Faraday Research

10


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