Why a Warren Presidency Might Not Be So Scary
Bernstein continues to attempt to downplay the effect that Elizabeth Warren becoming president may have on the markets. It may be less than we think, but for a different reason.
The extent of the worry about how Elizabeth Warren winning the presidency in 2020 may affect the stock market is well documented. Bernstein economist Philipp Carlsson-Szlezak is looking to deflect these concerns by looking upon the past. While this in itself does not have much merit as both the threat and the conditions are quite distinct this time, there is another reason why the danger here may be overstated.
In spite of Barron’s running an article on his views called “An Elizabeth Warren Win Won’t Tank the Stock Market. Here’s Why,” Carlsson-Szlezak himself isn’t so sure, and their using such a title in itself overstates his views pretty blatantly.
The concerns out there are hard to overstate though, with words such as petrified being used, and this panic already manifesting itself in options trading. Carlsson-Szlezak points out how unusual it is to see a bear market during an election year without already being in a recession, the fact that we are not so far away from one right now needs to be factored in enough.
There are times where contractionary fiscal policies may be welcome to some degree during inflationary periods, as a means of cooling things off, but inflation is barely above acceptable right now and is being kept afloat by the Fed’s current expansionary efforts, and policies that serve to reduce our money supply significantly can be expected to not only counter this but greatly accelerate the move down toward a recession.
This may be much like reaching the top of a roller coaster in a car that is being held back, and then being released and allowed to free fall down the coaster. The past is no solace here, and it does not even warrant discussion, other than to perhaps elude to the fact that these things usually aren’t as bad as we think, and the real reason why they end up that way.
If Elizabeth Warren were named Queen instead of President, and had power over both the House and Senate, this should surely make us quiver if we hold the stock market and the economy in our hearts. We would have an absolute crisis on our hands and this would damage the stock market and the economy in a way that would take years to recover from at best.
We do know how damaging major tax hikes are to a weakened economy, and we only need to look at Roosevelt’s tax hikes during the depression to see how harmful this can be. He ended up spending a fortune to stimulate the economy and then choked it with taxes to pay for it, and this ended up adding years to the period we call the Great Depression.
What We Wants and What She Gets Are Not Necessarily the Same Thing
We do not want to just look at Warren’s platform and let that necessarily scare us too much though. The taxes that bite are the ones that actually get passed into law, and it’s one thing to have a president hell-bent on taxing more and quite another to see this actually happen.
Warren’s wealth tax plan is a good example of this, where such a thing would need the support of not only the president but the House and Senate as well, and you at least need control of all three to do deeds as dirty as the ones she has in mind. This applies to all her proposals.
The saving grace here, and the one that we will need to pin our hopes on should Warren win if we worry about the economy, is that the Republicans are expected to retain control of the Senate, and if so, what ultimately gets signed to law will require their agreement.
We can immediately rule out all of the hardcore stuff in this scenario, and it is completely unimaginable that a Republican lead Senate would carry such things in their bag of potential compromises to avoid or ease gridlock. There may be some concessions here but this will be confined to their level of tolerance, which is nothing close to what Warren has in mind.
The framers of the Constitution have chosen well in creating this balance of power, in order to at least provide us some sort of safety net against the passing of laws unfriendly to the country as a whole, including ones that would harm our economy significantly at a time where it is so fragile.
It isn’t that we won’t see any changes in policy that the stock market or the economy would not like, and it’s also not that we won’t see a big selloff anyway if she gets elected. Stock markets over-react all the time and we only need to look to last year’s selloff to see this in action. If the Fed putting rates up in 2019, which actually did not happen, scares them enough to sell off by 20%, the threat posed by Warren even in practical terms is more significant than this.
Where the economy is concerned, seeing the bill nowhere near as high as she wants will matter a great deal, as we’re comparing destroying it with just knocking it down some for a while. We may see taxes against the wealthy and corporations go up at least somewhat in the end, and while this is not healthy for the economy, and could by itself cause a recession, it wouldn’t be likely to cause the crisis that has some people petrified.
One of the things that Carlsson-Szlezak points out is that the transition to the downside tends to be a late one, as in the month before the election, and we could see the same thing happening this time. Until this becomes enough of an issue to actually start scaring the market in a meaningful way, it is not appropriate for us to run scared either.
Donald Trump was all but counted out before he pulled off what could even be described as a small miracle during the last days of the campaign, and it will take more than the lead that Clinton had on him to count him out this time as well.
This May All Come Down to the Senate Races
Elizabeth Warren may not even win the nomination, although once again, the limitations on any candidate will be placed by the Senate, provided that the Republicans hang on to it.
It is the Senate not the Presidency that we should be focused on the most, our ace in the hole, and if this card does not get to be played, the losses will be much greater. If the deals only have to be made within the Democratic party, a party that is considerably more open to tax hikes than the Republicans, all bets are off and we may indeed be in for a rough ride down and a long recovery period.
The threat of a Warren may galvanize Republican supporters more than anything else might, provided that what is at stake here is sufficiently explained to them. All signs point to success, but not with a high enough degree of certainty that we may relax.
It turns out that Carlsson-Szlezak is not so sure that this will not cause a significant pullback in stocks, as he realizes how subjective and whimsical stock market reactions can be. He remarks that “if the conviction of enough market participants is that Warren wins and that her policies will be bad for markets, then markets may well price for that average conviction.”
This takes us well away from the smugness of the title of the article and into an area that instead suggests that this event may indeed hit the market pretty hard anyway, especially considering that it is not just that the market may price in fear, it always does. This is exactly what the concern is in fact, the one that is not supposed to matter and will see us just going about our business as normal in a Warren presidency.
While we await the outcome of this election, it is particularly important that we not jump the gun too much. The stock market’s gun is the fastest in the West already, so we should wait for them to draw first.
Editor, MarketReview.com
Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.
Contact Monica: monica@marketreview.com
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