Hillary versus Donald (or Ted) . . . the outcome could impact the economy, financial markets and financial advisors in different ways.

During an entertaining and informative presentation on Friday during the Transamerica Coaching Forum for registered investment advisors in Philadelphia, noted political observer Andy Friedman said Democratic candidate Hillary Clinton could have a more salubrious effect on the markets than her Republican rivals. And happy markets tend to make for happy advisor clients.

“I don’t see her administration making things more difficult for us,” said Friedman, principal at The Washington Update, which offers insights on the intersection of politics and investment and retirement planning. Under Clinton, he noted, we could expect a continuation of the status quo characterized by gridlocked lawmaking marked by 11th-hour/kick-the-can-down-the-road types of deals.

“Maybe that’s good for the markets because they like that kind of deadlock because they don’t have to worry about something crazy happening,” Friedman said. “The unpredictability of a Trump presidency will probably create market volatility. The markets like predictability, and Trump is anything but predictable.”

He offered that Trump’s desire for trade protectionism is a serious threat to the economy.

Friedman noted that a Donald Trump or a Ted Cruz presidency could follow the arc of a George W. Bush presidency. Namely, an initial positive jolt to the economy resulting from lower taxes and more government spending, followed by a ballooning deficit and worries about the economy faltering and heading into recession.

Friedman said one of the big issues of the current presidential campaign has been income inequality. The Democrat solution, he noted, is higher taxes on the affluent and additional domestic programs to help lower-income people.

Republicans take the opposite approach, he explained, by claiming we need to focus on growth, jobs creation and getting the government off the backs of businesses by undoing burdensome regulations. And, of course, they want lower taxes.

Either way, the federal budget deficit will probably rise. And failing a major tax overhaul (unlikely) and entitlement cuts (also unlikely), Friedman said one of the ways politicians will try to trim the deficit is by closing tax loop holes, some of which could impact the bottom line for investors.

“There will be a withering away of the opportunities for affluent clients to save taxes,” Friedman said. “So advisors will want to pay more attention to tax drag on investments––things like harvesting losses, buy-and-hold strategies . . . and muni bonds, MLPs and REITs, which all flow through income with little or no tax. Try to hold tax-inefficient investments, like mutual funds that throw off big dividends, in tax-deferral accounts such as IRAs, variable life and variable annuities.”

He noted that life insurance can provide a source of tax-free income in retirement, which can help clients delay taking Social Security and/or not having to sell appreciated assets.

“Using life insurance for income-tax planning is crucial right now and we need to pivot from using life insurance as an estate vehicle to an income vehicle," Friedman said. "Same thing with annuities with their ability to provide a tax deferral, along with lifetime income and the ability to avoid volatility.”

November Election

As for the November election, Friedman offered his three cents that he expects the Republicans to keep control of the U.S. House of Representatives regardless of the outcome of the presidential race.

“Republicans will keep the House of Representatives, not just in 2016 but for the rest of the decade” he predicted. “And if they continue to control the state governments––they hold 31 currently––they’ll probably control the House for the next decade as well when we have redistricting in 2020.”

The U.S. Senate could be a different story. “I believe whoever wins the White House is likely to control the Senate,” he said.

Regarding the presidential race, Friedman predicts that Clinton will face Trump in the general election, but that you can't rule out Cruz if there’s a contested GOP political convention this summer.

All three candidates have very poor favorability ratings, but Clinton’s rating is better on a relative basis. In addition, he noted, several factors seem to be favoring the Democrats.

For starters, the candidate who can attract minority and women voters will probably do better in the election. “If the Republican candidate stays at [getting] 17 percent of the non-white votes (what GOP candidate Mitt Romney got in 2012 and what Republicans have roughly been getting in recent years], he will need 65 percent of the white vote to win the election. That was approached just once, by Ronald Reagan in his second term,” Friedman said.

Another big factor will be how independent voters will swing in November. According to Friedman, this year marks the highest percentage of independent voters during a presidential election year––42 percent versus 40 percent in 2012. He posited that independent voters by and large are more concerned with economic issues, jobs, taxes and fiscal matters, and they don’t like the dogmatism and partisanship they see in Washington. 

“So the party that’s better able to focus on economic issues and compromise will probably do better with the independents,” he said.

And another part of Friedman’s calculus pertains to the Electoral College, where a candidate needs 270 electoral votes to win the election.

“By adding up all of the states I know will lean Democrat, they’ll have 257 electoral votes,” he said. “And if I do the same with Republicans, they'll have 191. If you look at the states that comprise those 90 electoral votes remaining, the Republicans will need to run the table on these states in order to win.

“I think the numbers favor the Democrats,” he continued. “The Democrats tend to get more minority voters, have less far to go to win the Electoral College, and I think it’s fair to say that so far they’ve focused more on economic issues and less on social issues. Based on the numbers and the negativity for Clinton versus the Republican candidates, you’d have to say the Democrats have a strong advantage heading into the general election.”

DOL Rule
On a final note, Friedman said the recent fiduciary rule from the U.S. Department of Labor wasn’t as bad as the broker-dealer industry initially feared it would be.

“Because the proposed rule was so terrible, and this rule is a significant improvement, we’re all kind of saying that maybe it’s not so bad,” he noted. “Still, in my mind this is a solution in search of a problem.”

And while he expects litigation and attempts to get an injunction by opponents of the DOL rule, ultimately he doesn’t think they will make much difference to the final outcome. “The fact the DOL backed off significantly [from its proposed rule] tells me a court case might be more difficult now.”