Initial Policy Thoughts

A policy discussion at this stage requires a big disclaimer. It is very early. We have little information about Trump’s policies. Any policy discussion at this point is speculation. That said, ironically, Trump’s and Clinton’s stances on several key issues are surprisingly similar:

· Budget deficit and entitlement reforms. Neither candidate seems to have expressed much concern about the federal budget, including entitlement reforms such as raising the age for social security and Medicare. By not aligning with the conservative movement on this issue and avoiding the controversial topic, Trump may fare better in the general election. And Trump’s business record certainly suggests he is comfortable with debt.

· Drug pricing. Both candidates have expressed support for the government to negotiate drug prices directly with drug companies for the Medicare and Medicaid programs to help control healthcare costs. The issue of high drug prices has been a political hot button, but prices are likely to remain largely in the manufacturers’ hands regardless of who wins the White House in November.

· Foreign trade. Trade policy has been a major issue in both parties’ selection process. Trump has made his distaste for current trade policy well known, calling for higher tariffs and other restrictions, particularly with respect to Mexico and China, to get “better deals” for the U.S. Clinton has officially denounced the Trans-Pacific Partnership and as a member of the U.S. Senate, voted against the Central American Free Trade Agreement (CAFTA), which effectively extends the NAFTA agreement to Central American nations.

· Infrastructure spending. Both candidates have supported, at least conceptually, the idea of spending money on public works projects such as fixing roads and bridges to help stimulate the economy and increase employment. In what has in recent years been more of a Democratic position than Republican, the tailwind behind infrastructure spending may get a bit stronger next year.

· Tax reform. At times, both candidates have supported higher tax rates. There does appear to be genuine, and relative bipartisan agreement, on many aspects of the tax code, especially on lowering the corporate tax rate, limiting deductions, and eliminating loopholes. Trump and Clinton are both in favor of eliminating carried interest, an exemption that allows hedge fund and private equity managers to pay low long-term capital gains rates on the majority of their compensation. We expect that regardless of who wins, some changes to the tax code will occur.

We are not saying these candidates are the same, even on these issues. Both candidates will refine their policy proposals as the election nears; both have also shown some flexibility on issues due to political considerations, while the rise of populism will likely have more influence. And certainly Congress will have a lot to say about legislation. It’s going to be a very interesting six months.

Conclusion

Markets do not like uncertainty, and Trump is certainly unpredictable. But election years are historically good for stocks. Although more volatility may lie ahead, we could potentially benefit from a late-year rally as the macroeconomic and earnings backdrops improve. So even if the headlines from the campaign trail lead to pullbacks or corrections between now and November, more likely than not, we would view them as buying opportunities.