Depending on your viewpoint, this year’s presidential election is disconcerting, entertaining, puzzling or all of the above. According to one pundit, it’s also potentially the most impactful election in decades, and the expected close race could be decided not by Donald Trump’s big mouth or Hillary Clinton’s possible indictment (although both are possible wildcards), but by interest rate hikes and their impact on U.S. equities.
Speaking at Pershing's INSITE 2016 Conference in Florida, the chief equity strategist at Federated Investors, Philip Orlando, dusted off his crystal ball and gave his far-ranging take on the economy, the markets and politics. And while he didn’t put himself on the line with absolute predictions about who’ll win the election and what the markets will do, he used history as a guide to help investors—and voters—divine which way the winds might blow.
The context: Orlando believes Janet Yellen is probably a lame-duck one-term Federal Reserve chief because whoever wins the presidential election probably won’t renominate her when her term expires at the end of 2017. As a result, he offers that Yellen sees the writing on the wall and is managing her legacy by checking off items on her to-do list.
The first item was tapering the quantitative easing program, which she completed in December 2014. The second was beginning the process of raising the Federal Funds rate, the overnight lending rate that depository institutions charge each other for balances held at the Federal Reserve, which is a key monetary policy tool. The third is scheduled for next year with plans to start unwinding the Fed’s $4.5 trillion balance sheet.
Orlando added a fourth item—avoid a double-dip recession. The thing the Fed is most scared of, he said, is to make a policy error much as the Fed did in 1937.
“That [a double-dip recession] is not our forecast, but we are looking at a deceleration in terms of economic growth and the labor market,” Orlando said. “The economic metrics the Fed are looking at aren’t going in the right direction.”
And that’s key heading into the upcoming election. “I believe the election might be the most significant election in our lifetime because we’ll be dealing with five key elements of government,” Orlando said, referring to the race for the White House, his take that the U.S. Senate and House are both in play, the likelihood of a new Fed chairman and its impact on monetary policy, and the potential to reshape the Supreme Court given that three justices are at least 77 years old, coupled with the immediate need to replace the late Antonin Scalia.
Looking at the electoral map, Orlando said it’s clear how 40 of the 50 states will vote, and that points to Democrats having a decided edge with 217 of the 270 electoral votes needed to win. It’s all about the swing states (and independent voters), he offered, mentioning Florida, Ohio, Pennsylvania and North Carolina as key battlegrounds.
“I believe whoever wins the White House will win the Senate because the Republicans have a narrow five-seat majority,” Orlando said. “Thirty-four seats are up for grabs. The demographics favor the Democrats in 2016.”
One of the tea leaves Orlando highlighted was that this is President Obama’s eighth year in office, and that he is the fifth president with an eighth year in office during the past 70 years or so, and that the stock market was down about 11 percent on average during the eighth year of those past administrations, and that the year-to-date return on S&P 500 in 2016 is more than 3 percent.