Last month, the U.S. stock market extended a two-month rally into August and hit an all-time high. Optimism surrounding corporate earnings has converted more investors back into the "risk-on" camp, guiding assets into emerging markets and back into a post-Brexit Europe.
As this earning season wraps up, U.S. corporate earnings have come in above expectations with 78% exceeding forecasts. Investors are showing more confidence in central banks as they continue efforts to boost growth. That is played out in a shift favour for higher-risk emerging market debt.
In this positive environment, analysts are favouring a Fed rate hike, with 55% expecting that hike to come in December. In the lead up, however, the U.S. will have to take stock of what the election will mean for the economy in the coming presidential term. To help paint a clearer picture of what the pending election will mean to the economy, we’ll look at three key differences in each camp below.
Mr. Trump’s plan is unrealistic as it would send tax revenues plummeting to a level too low to sustain spending. On the other hand, raising corporate taxes encourages business to send operations overseas to countries where rates are lower. An ideal scenario would be to land in the middle, encouraging economic output enough to increase the tax haul by the government. Since both options would likely dampen productivity in the US, they may face heavy opposition before being passed.
From a tax code perspective, simple is usually better, and it will be difficult to eliminate inefficiencies by complicating America’s rules-heavy tax code. Should Mrs. Clinton’s plan come through, the efficiency of the American machine may be hampered. If Mr. Trump’s plan, which favours wealthier Americans, comes into play, the gap between rich and poor would likely widen and fuel political tensions.
Both candidates express a concern in a declining manufacturing sector, which has been on a steady trend down as productivity increased and pushed workers into higher skilled labour jobs. This trend should be embraced as productivity increases will drive the U.S. economy forward, and limiting trade won’t help low-skilled workers. While Mr. Trump offers a protectionist strategy, it’s improbable that his plans to eliminate existing partnerships will pass. If they do, expect to see retaliatory tariffs on American exports, which will reduce overseas sales, lower the purchasing power of Americans on their imports and cause average wages to fall. In any case, many expect to see the progress made in the TPP tested post-election.
Historically, an increase in minimum wage leads to job losses in the short term as companies struggle to keep pace with increased expenses. American unemployment is currently low at a 4.9%, the poverty rate has been falling and real earnings have risen by 5% over the past two years. The U.S. job market is more of precedent on the global stage rather than a laggard. Spending on infrastructure is great for stimulating the economy and investing in the future. While both candidates plan on spending, how they will raise the money remains the bigger question.
Although it may seem more than likely that we’ll see the first female U.S. president, the lead up to the election can stir volatility in the market. If that’s the case, don’t let the headlines fool you. Market fundamentals are strong, and they’re the key reason behind this latest rally.