Markets Are Alive, Breathing and Focused on the Future
Financial markets are forward looking. They are a coming together of hopes and fears from people all around the world. They are alive, breathing and focused on future conditions.
The Big Q: How with the markets “vote” the Presidential election?
There is no incumbent running for President this election cycle, meaning, there is no status quo candidate.
In terms of tax and spending plans released so far, the closest candidates that American’s get to existing economic conditions are Hillary Clinton on the left and John Kasich on the right.
It is no surprise both get lots of donations from Wall Street. So does Ted Cruz, though his proposed policies to cut taxes and government spending could lead to a bit more growth.
A few polls show Republican front-runner Donald Trump as the smart pick for a continued stock market rally, some analysts are skeptical.
Donald Trump wants to bring American manufacturing home, and that would mean higher wages for US workers. His is a message that resonates with the voters, particularly after 8 years of slow economic growth. It is also an argument that America needs more jobs for people with manufacturing skills who have lost out in recent years as many firms migrated offshore.
But what would that mean for corporations paying out higher wages?
Right now, Apple (NASDAQ:AAPL), sports profit margins of 22.8%. That is good for a tech company that makes a lot of physical, tangible items. A few software firms, who have no manufacturing to make, can post higher margins.
Now, let us say Apple now has to make its products in the US.
Sure, there is the benefit of higher wages for some US workers. But Apple shareholders would likely see profit margins fall towards the long-term corporate average of 8-10.
The market does not like seeing a company’s profit margins drop so much without the promise of a Hot new product to make up for the decline. So far Apple is not showing Hot new products.
So, Donald Trump might not be good for stocks. But compared to the other outsider running well in the Presidential race, Vermont Senator Bernie Sanders, he is in great shape.
Why? Well, because Senator Sanders has proposed a series of further government intrusions paid for in part by a tax on short-term trading.
Taxing Wall Street in part to pay for these policies will make markets more illiquid and thus dangerous. Bernie Sanders’ plans to increase government spending by over $15-T in a decade would mean a smaller private sector to take from.
If he gets his entire bag of goodies from free college to universal healthcare, estimates are that US GDP (gross domestic product) would shrink by 9%. That assumes everything goes smoothly.
By comparison, during the housing and financial crisis in Y 2008, GDP only fell by about 4% from peak to trough.
And that frame included a lot of fear and uncertainty that the Market felt over the then-uncertainty of the rise of Senator Barack Hussein Obama at the polls.
So keep an eye on the polls, as your future depends on it.
I expect that we will see some more pullbacks ahead, likely a correction, and not all of it will look rational from a financial perspective.
We will be seeing the market pricing in future political uncertainty.
Have a terrific weekend.
Paul Ebeling
HeffX-LTN
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