There is now clarity who will contest this year’s US presidential race. Unfortunately, that may be the only thing clear in a campaign which has set new standards for unpredictability. Donald Trump's candidacy was met with derision a year ago. Until his rivals quit, many were sure we were set for a contested convention. Why should the unpredictability stop now?
The distraction of a Hillary Clinton-Trump matchup could subdue sentiment over the next few months, but it may also direct market attention from the more important questions about what fiscal policies we should expect from this political transition. At the moment, our concern is we will not get what would to the next stage would be a long, drawn-out can of worms. Even a 'soft exit' – where trade relationships and freedom of movement are broadly maintained – would probably need several years just to end up close to square one.
Greenland’s (EEC) departure in 1985 took three years. The UK – much larger and, after 43 years, more entwined in the European project – would need even longer. Brexit would then risk a spillover into the remainder of the EU. A 'trap door' opened by the UK could well be approached by others. This questions the EU as a relative haven. In which case – given the second-round effects and the ECB’s ongoing QE – Brexit would probably benefit the US dollar and Japanese yen. be helpful in supporting a fundamental earnings recovery – regardless of who wins. Clinton's average 'strongly unfavorable' rating has been around 37%, Trump's has been a staggering 53%. No one else in recent history has alienated more than 32% of the electorate at this stage of a presidential campaign.
This matters because we believe when the president lacks a real mandate it reduces the likelihood of meaningful policy progress on a number of vital issues for corporates: corporate tax reform, infrastructure spending, and more rational regulatory and trade policy. Fiscal gridlock and trade uncertainty could leave the Fed still doing all the heavy lifting to keep our recovery on track.