Is the 2020 Campaign Already Shaping the Stock Market? - Barron's

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Lost in last week’s headlines was some actual good news: The net worth of U.S. households rose to a record in the first quarter, according to the Federal Reserve. A rebound in the value of their stocks and mutual funds, combined with the continued, steady increase in their real estate holdings, helped to lift their net worth by 4.5% in the first three months of 2019, to $108.6 trillion. That more than reversed the 3.7% drop in the fourth quarter of last year, when the equity market swooned.

If you missed that, it may be because it got lost in the cacophony of tweets and talking points. But it also may be that the good news didn’t touch most Americans. Torsten Slok, chief economist of Deutsche Bank Securities, observes that 10% of the richest U.S. households now control 70% of the nation’s wealth, up from about 60% at the turn of the century. Based on the demographics of Barron’s readers, you probably count yourself among that fortunate top decile, but the news might mean little to the other 90%, which haven’t participated in the gains.

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But it also may have escaped the notice of many investors because, as David Rosenberg, chief economist and strategist for Gluskin Sheff, tweeted, the stock market has provided investors “nothing except the dividend, volatility, and acute anxiety” for the past 16 months. The S&P 500 index has crossed the 2800 mark 19 times since it first reached that level in January 2018, he notes.

What has changed in the past year and a half? For one thing, the Fed has increased its federal-funds rate four times in one-quarter-percentage-point steps. There also have been other changes, writes the Strategas Washington policy team, led by Dan Clifton. After the powerful combination of supply-side tax cuts and deregulation boosted growth last year to 3%, “recent events have shifted U.S. economic policy towards increasing taxes (tariffs) and regulation, which is a toxic mix for risk assets,” they write in a client note.

Those policy moves include the escalation of tariffs on China, the sudden imposition of tariffs on Mexico for anti-immigration purposes, and a “coordinated antitrust attack on U.S. tech companies,” according to the Strategas strategists. The combination means that companies are devoting more resources to shifting supply chains and complying with government rules than to growing their businesses, they add.

But why would President Donald Trump make these moves if he needs a strong economy for his re-election campaign next year? Clifton et al. suggest that Trump is trying to drive a “political wedge” between himself and his potential Democratic opponents, outflanking those on the left on tech regulation while hammering former Vice President Joe Biden, the current front-runner for the Democratic nomination, for his past support of trade deals with China and Mexico.

The president is making these moves, the Strategas team contends, because his internal polling shows that he’s trailing in key Midwestern states, despite a strong economy. Other observers suggest that Trump is moving now toward policies that play to his political base, such as on immigration, which may hurt the economy and the markets in the short run. Then, he can tack to market-friendly policies in time to have the economy and stocks roaring into Election Day 2020. As part of this strategy, the Federal Reserve would probably come under pressure to cut interest rates to offset the economic weakness brought about by the tariffs and regulatory changes, as well as by its own tightening moves. (More about the central bank later.)

As for this scenario, we know what often happens to the best-laid plans of mice and men. But the real point, according to Strategas, is that the “2020 election is already infecting financial markets.” Never have politics had so pronounced an effect, they write. “In this case, markets are responding two years ahead of the election. This is negative for risk assets in the short run because the market of voters is dominating the market of investors,” they conclude.

Among the sectors that the Strategas team sees as vulnerable, in addition to those affected by the fallout from the China trade tiff, are health care, even though Medicare for All remains a low probability; drug pricing, with Trump possibly outflanking the Democrats on this issue, which draws attacks from both sides of the aisle; increased bank regulation, especially if Sens. Bernie Sanders or Elizabeth Warren emerge as the Democratic front-runner, which could provoke Trump to reignite his antibank rhetoric from the 2016 campaign.

They also suggest that Trump could go after carried interest, the tax break for hedge funds and private equity that he and others have criticized. And, to draw a contrast to Biden, he could boost stocks by effectively cutting capital-gains taxes by indexing them to inflation (even if the legality of this is open to question). The probability of all these things happening is low. But what’s striking is how many are possible.

Perhaps no move has been felt as acutely, if only momentarily, as the regulatory attack on Big Tech. “Going after Google [whose parent company, Alphabet , trades under the ticker GOOGL], Amazon.com [AMZN], Facebook [FB], and Apple [APPL] also has political benefit for Trump, as the president is demonstrating that no candidate can go to the left of him on these issues,” the Strategas team asserts. Those stocks collectively shed some $130 billion in value on Monday, in reaction to the government regulatory moves.

But Eric Savitz, our prodigal tech columnist who has returned to the Barron’s fold, writes that iconoclastic entrepreneur and New York University professor Scott Galloway argues that investors could come out ahead if these tech giants were to be broken up.

It’s telling, the Strategas folks maintain, that with next year’s election already infecting financial markets, investors, in the short run, are being forced to take into account more than earnings and revenue growth, price/earnings ratios, and other fundamentals. So, these may be markets, but they aren’t what anyone would call “free.”

Write to Randall W. Forsyth at randall.forsyth@barrons.com

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https://www.barrons.com/articles/is-the-2020-campaign-already-shaping-the-stock-market-51559957959

2019-06-08 01:39:00Z
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