So, this whole election thing... and the markets... and your business...

NOV 2, 2016

by Kenny Polcari, CFO Integral Board Group

What does the Presidential election mean to the markets and should investors or business leaders be so concerned? That is the question on everyone’s mind now and for good reason. The markets are all about expectations – it’s that simple.  In the end, it is not about the President at all, it is about what to expect from ‘the administration.’ And should you be concerned? Well – THAT depends on who you are. Are you a long-term investor or a short-term trader? Are you a strategic planner in your business or reactive? Long term, you want to take advantage of the movement and sales that go on if the underlying narrative remains the same, so you must decide what narrative you expect and then invest accordingly. If you are a trader, then it makes no difference to you who is President – you just want to trade the volatility, so who will give you more volatility?
Look, it’s all about ‘expectations for the markets’ and what is already priced in vs. what a surprise could create… Now think back to the summer when the Brits were faced with a decision  concerning their continued participation in the European Union (EU) experiment that began decades ago. The polls were calling for a close vote, but in the end, they called for a win for the ‘remain camp’ and the British market along with the global markets appeared to be in that same camp. In the weeks prior, questions arose – Were the polls, right? Could there be a surprise and if there was, what would that mean for the markets? Global markets began to stress one day but then recover the next as the possibility of an exit never seemed possible. And then the impossible happened and global markets went into a seizure. European markets were the first to react as the markets were open there when the tallies started to come in. The FTSE swooned and other European mkts followed suit. Then the sun set on Europe and rose over America. US futures were trading lower and the tone was decidedly bearish. How could this have happened – how could the pollsters have been wrong?
What we saw over the next couple of days were markets in turmoil as the expectations now turned to reality and had to re-price. While the action was swift and for some painful, cooler heads prevailed and the market began to look forward once again creating expectations about what was to come. Long term investors that had the guts to stand up in the face of the selloff fared much better because the FTSE and European markets are higher today as reality set it.
And so if you asked me two weeks ago, "Who was the market expecting to win the US Presidential election?," I would have told you that the ‘expectation’ was for a Hillary win and I would also have told you that the Democrats were going to take the Senate while leaving the House bruised but in Republican control. Janet Yellen would remain at The FED and monetary policy would continue to be more accommodative to assist in the transition.  But, that was until the narrative changed once again at the end of last week  causing the market to quake.
You see, the market has begun to price in the ‘possibility’ of an upset and what does that mean? Well, a bit of a correction – because prices did not reflect this possibility and the possibility is more than just the WH – now the conversation has changed to ‘down the ballot.’ And could this now become a Republican sweep? And what happens at the FED? Will Janet be out before year end? Will monetary policy take a sharp right turn creating havoc in the markets as Donald Trump readies himself for that walk down Pennsylvania Avenue? And what does this all mean for the small/medium business and business owner?
Clearly, the economic policies are quite different under a Democratic President vs. a Republican President. We have had 8 yrs of Democratric rule, 8 years of more regulation, bigger gov’t, higher taxes and a stunted recovery. Trump's economic plan calls for across the board tax cuts for everyone – this will be key to launching a real recovery and will help to stimulate small business growth and investments. He wants to cut the red tape and reduce the stranglehold of regulation so that business can thrive. He wants to encourage US dollars to come back to this country to help fuel the next huge economic advance and he wants smaller gov’t.

Hillary’s economic plan calls for middle class tax cuts and small business tax cuts and raise infrastructure spending to $27.5 billion to fund new roads and bridges, $27 billion for preschool classrooms and $35 billion to refinance student debt. She is pushing for a national minimum wage of $15/hr which sounds reasonable, but will only force more technology to create efficiencies – which will eliminate more jobs. (see the McDonalds introduction of ATM-like order kiosks that eliminate jobs to create efficiency). She wants to raise the regular tax rate on anyone earning over $225k per year, raise short term capital gains tax as well as the longer term tax rates on investment held longer than 2 years. She wants to add surcharges and restore the estate tax to levels not seen since 2009 and she wants bigger government to watch over all of us.

This has never been good for small to midsize businesses at all – but it is, I fear, what we are about to get because no matter the most recent chatter about emails, infidelity, corruption, mental lucidity, etc, the markets are still on the side of a Clinton win for the White House – but the jury is out for the Senate and the House. If the market stabilizes here, then that will surely point to a Clinton win. If the market comes under more stress and volatility, then the cards may be shifting suggesting a Trump win and a swift market reaction.


Kenny Polcari is a Board Member of Integral Board Group. Integral Board Group (IBG) is a Board Service Provider (BSP) specializing in performance-based, board advisory services for small to mid-market companies in all verticals. Benefits of a Board as a Service (BaaS) include a single entity, accountable as a team, providing cohesive governance and is specifically tied to a company’s performance. IBG improves business performance by providing seasoned advice in the areas that every business will face during all phases of its growth cycles.