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06 September 2016

Hillary's world 

By early September, Hillary Clinton looked more likely than ever to be elected the first female American president, with most oddsmakers giving her an 80-85% probability of victory in November.

Barring a major surprise – such as in the ongoing disclosure of her emails or during the upcoming debates – investors should start considering the likely economic consequences of a Clinton election. Key elements of her platform include:

  • Increased taxes on income and capital gains for the wealthiest individuals, including a cap on the value of deductions and a complicated reduction in capital gains taxes for longer holding periods
  • Increased infrastructure and education spending, and additional support for lower-income households
  • A higher minimum wage, greater support for university and community college education, and mandatory paid family leave
  • Support for continuing or increased legal immigration

On balance, these proposals should increase employment and overall growth.

Increased infrastructure spending will directly stimulate the economy and enhance long-term productivity. Clinton’s immigration proposals should increase the number of skilled workers in the country, while support for university and community college education should pay long-term benefits in terms of a more highly educated labor force.

The transfer of wealth from high- to low-income households should also, on balance, prove stimulative. Lower-income households tend to spend a greater portion of their income, while higher-income households are better able to maintain consumption levels by reducing savings.

Less clear is the impact that higher taxes on the wealthy will have on investment. In particular, the complicated proposals to increase the capital gains tax, with reductions for longer holding periods, may change investor behavior unpredictably. On the whole, the impact on total investment is likely to be limited, but private investor behavior may change in surprising ways.

Analysis by Moody Analytics suggests the following specific outcomes for the United States in 2020 if Clinton’s entire program is adopted, compared to current Policy:

  • Approximately 3.2 million additional jobs would be created
  • GDP growth would increase to 2.7% versus the current forecast of 2.3%
  • Inflation would rise 0.2% to 2.6%
  • 10-year Treasury yields would increase 0.6% to 4.6%
  • National debt would rise slightly, but the debt-to-GDP ratio would fall marginally (down 0.7% to 78%) due to higher economic growth

On the whole, this scenario presents an attractive outcome for low- and middle-income voters, one which would seemingly guarantee her victory if voter perceptions were not so negative. (Both Clinton and Donald Trump are viewed unfavorably by the majority of eligible voters.)

A key question, of course, is to what extent President Clinton could actually pass her proposals into law. Here, the picture becomes cloudy, especially as the chances of a landslide victory appear highly unlikely given the two candidates and the current divisions in American politics.

The most likely outcome appears to be Clinton in the White House, with Republicans retaining control of the House of Representatives and the Senate evenly divided among the two parties – with a slight edge to Democrats at this point. That would mark first time in over 100 years that a newly elected president’s party did not control Congress.

Ongoing stalemate in Washington would mean limited change to the status quo, which should lead to continuing modest economic growth and few radical changes in outlook. From this perspective, a Clinton presidency is likely to be the better outcome for investors.

One area where her position remains unclear is international trade. A longtime supporter of free trade, candidate Clinton has promised modifications to the Pacific (TPP) and Atlantic (TTIP) trade agreements, seeking to appeal to supporters of Bernie Sanders and to cut into Trump’s popular appeal on this issue.

This is a subject – along with corporate tax reform, about which she has so far said little – where Republicans and Clinton could theoretically find common ground, reflecting the widespread sense that the benefits of free trade have been unequally distributed. Indeed, the new American politics of trade may have a significant impact on the world economy, and on investment strategies.