In April 2014, we wrote:
With 0.0% of precincts reporting, CNN declares Hillary Clinton CNN the next president of the United States. Really? We haven't even gotten through the 2014 mid-term elections yet, yet campaigns (and the media circus that lives for campaigns) are already gearing up for 2016. For 2014, it seems likely that Republicans will retain the house and majority of state governorships. There is a 50/50 chance that Republicans take control of the Senate. Regardless of that outcome, we don't expect any significant legislation out of Washington in the next 2 ½ years.
In March 2015, we wrote:
We believe the Republican primary process will operate like a circular firing squad. The survivor will stagger into the general election July 22nd, 2016 (the convention ends July 21st) bleeding from multiple wounds, easy prey for the rested and well financed Hilary Clinton.
In September 2015, we wrote:
The Trump Insurgency: Donald Trump presently dominates polls of Republican voters, with twice the popularity of Ben Carson and three times the popularity of Jeb Bush. In general election matchups, he's the only Republican candidate to match Hillary Clinton.
After flirting with presidential runs in 2000 and 2012, Trump announced for 2016 on June 16th. To the general astonishment of pundits, Republican Party officials, the other Republican candidates (16 at last count), comedians and ourselves, Trump blew away the competition. Incredibly, the more outrageous Trump acts, disparaging Hispanics, women reporters, women in general, other politicians, veterans and POW's, the higher he scores at the polls.
Our only reasonable explanation is that American are so unhappy with establishment politicos and are so aggrieved by their sense of economic and social malaise that they're will to take a chance on Trump. Starting in the 1990's and accelerating since 2000, American society divided into the "have's" - credentialed, educated, urban information workers, and the "have-not's" - minimally educated suburban and rural manufacturing or service workers for whom a house, job, medical care and retirement benefits are increasingly insecure propositions. As we said about China, "governments are commonly at greatest risk from the frustration of 'rising expectations.'"
We've talked about the "biblical plague of Republican nominees." Thanks to the collapse of campaign finance laws, anyone with a billionaire backer and a dream can run for president. Trump engenders more "trust" than the other 16 candidates because, as a billionaire himself, he isn't "owned" by David & Charles Koch, Sheldon Adelson, Woody Johnson, Ken Lagone, David Geffen or any number of major donors, Republican or Democratic. His insults are interpreted as "truth to power" by his fans. These 30 supporters from a broad political spectrum explain "why they believe that the billionaire real-estate developer will treat them any better than the career politicians they mistrust."
Electoral College math still favors the Democratic nominee, but Trump's surge is the first time in two years we think any Republican has a chance to beat Hillary Clinton.
In March 2016, we wrote:
As of this past week, the conventional wisdom is that Trump and Clinton are the nominees. Political analysts expect that the Republican surge in participation in the primaries will be matched by a surge in Democratic participation in the general election. Trump scores a lower percentage of blacks, Hispanics, women and the young compared to Romney in 2012. Electoral college math kicks in, Clinton is elected the president AND possibly the Senate flips back to Democratic. But, as we noted above, "Since June, the conventional wisdom has been 100% wrong about Trump."
Bottom line: Trump COULD win.
In May 2016, we wrote:
Assuming Clinton prevails and becomes the Democratic nominee, we can make projections by looking at state by state polling. At present, Clinton outpolls Trump by 10% nationally. According to calculations at the NY Times, that lead would deliver the electoral college to Clinton 347-191, a slight improvement over Obama's 2012 results in 2012 of 332-206. However, a 10% lead this early in an electoral year can easily reverse, just ask Jimmy Carter in 1980, or George HW Bush in 1992. With a lead trimmed to 5%, Clinton would still win, but just 285-253 (Trump gains Florida, Ohio and North Carolina.) In a dead heat at the national level, Trump would also pick up Colorado, Iowa, Ohio, Pennsylvania, and New Hampshire, and would win 305-233.
On November 2nd, 2016, we wrote:
At the national level, Clinton leads by a razor thin 1.7%. However, ONLY results in the Electoral College matter. 263 electoral votes are likely to solidly in the Democratic camp, while the Republicans have to make up quite a deficit from 148. 127 electoral votes remain in the "toss up category." For the win, Clinton needs 270 votes. Three states, Florida, Ohio and North Carolina, have the potential to deliver the "kill shot" to the Trump campaign. Trump has to win ALL three of these states, plus 2 of 6 other states. At present, Clinton is likely to win North Carolina, is on a knife edge to win Florida, and probably will lose Ohio. No matter: By 8 PM on Tuesday, if Clinton has won any of these three states, "game over" for Trump.
On November 9th, 2016, we wrote:
As of Monday evening, one day before the election, all 15 major political forecasters tagged Clinton for the win. FiveThirtyEight.com was the most conservative, forecasting an electoral split of 272-268 in favor of Clinton with a 66% probability of success. The mood among Republican operatives, even the candidate himself, was despondent. No candidate in modern electoral history who polled so badly post Labor Day had ever won.
And yet, by 10PM last night, Trump won the three major states (Ohio, Florida and North Carolina) he had to win to stay competitive, plus enough of 6 more states to exceed 270 electoral votes by 2:30 AM. Republicans retain control of the US Senate and House of Representatives, plus choose the next Supreme Court Justice.
What's the point of revisiting old commentaries?
Our job is to make good decisions in an environment of permanent uncertainty. To succeed at this task, we must revisit our past research, ESPECIALLY when we are wrong. What went wrong with our analysis of the election?
First let's consider what we got right:
- Clinton was the ultimate Democratic nominee
- The Republicans did indeed organize a circular firing squad, producing a nominee NO ONE expected (not even Trump.)
- We noted that if Clinton couldn't put away Sanders, the email server or the Clinton Foundation issues she would struggle.
- In particular, we identified the division of the country into "haves" and "have-nots." In principal the combination of low unemployment, low inflation, low gas and fuel prices, record GDP, record number of workers employed, stock market at record highs, real-estate prices approaching record highs, should have ensured a slam dunk for the party in power. However, the gains unevenly favored "coastal elites" over the "Rust Belt" working class.
- These factors created an opportunity for Trump to win, even if we regarded that outcome as low probability.
- Ultimately, electoral college math would prevail
Here's what we got wrong:
- The final electoral college count!
In July 2015, we wrote:
How the sausage is made:
- About 220 million Americans are eligible to vote (the other 93 million are either too young, disqualified by a criminal record, or disenfranchised by lack of identity credentials (certain states.)
- The turnout rate varies between 50-60%. We project turnout on the low side in 2016 (let's say 55% Actual 58.8%, highest since 1968. ), so 120 million voters. Actual count was 135.5 million.
- 48% of voters will vote Democratic reflexively, 45% will vote Republican, so the voters that are in play only amount to 7% or 15 million. Actual was 48.1% Democratic, 46.2%, 5.6% other.
- These voters are "independent" or "undecided" or simply too distracted to think about the election until the final weeks. And also refused to answer pollster's phone calls.
- In many states, the opinions of the undecided voters don't matter - New York will vote Democratic; Texas will vote Republican. Yes.
- These states: Colorado, Florida, Nevada, Ohio, Virginia, Iowa, New Hampshire, and to a lesser degree North Carolina and Wisconsin will be swing states in 2016. Yes.
- 270 out of 538 electoral votes are required to win the presidency (a tie at 269 throws the elections to Congress, with the House voting for president and the Senate voting for vice-president. Given current composition of Congress, a tie would ensure a Republican White House.
- At present, the Democrats will likely start Election Day with 247 votes already in the bag versus 206 for Republicans. On the morning of November 8th, Clinton scored 227 firm votes versus 217 for Trump, with these states still in play - Florida, North Carolina, Pennsylvania, Michigan, Wisconsin and New Hampshire.
Through most of Election Day, Clinton polled ahead of Trump in Florida, Pennsylvania, Michigan and Wisconsin (urban precincts tabulated votes faster than rural districts.) Yet, by 9 PM, as the tally continued, one state after the other of these four flipped from Clinton to Trump, leaving Trump in the end with 306 votes over Clinton's 232.
Of cold comfort, Clinton exceeded Trump by 2.56 million in the popular vote. The unexpected swing states were: Michigan, voting Republican for the first time since 1988, Wisconsin, voting Republican for the first time since 1984, Pennsylvania voting Republican for the first time since 1992. A shift of 80,000 votes among these three states (0.06% of votes cast) would have changed the outcome.
Among those three states, the swing voter was:
- A woman
- 40-55 years of age
- Educated through high school
- Economically stressed
- Rural or small town inhabitant
- A previous Democratic or non-voter
- Doesn't talk to pollsters
Can we generalize about this voter's motives? Why not! This woman works three part time jobs at minimum wage. Her husband is on disability, unemployed since 2009. She has family members addicted to opiates. Her family has not seen a real increase in income since 1990, and the future looks bleak.
Some guy flew into town on a fancy (second-hand) jet, held a monster rally and promised her husband a job (like the old times!) This woman doesn't care about ANYTHING that's important to coastal elites (the environment, LBGT rights, opposition to misogyny, racism, keeping religion out of public life, actual preparation for public service.) Give her husband a job, and that candidate can do whatever he wants!
So now we face an interesting two years. In 2008, Barrack Obama beat John McCain on a platform of "Hope and Change," capturing many young and first-time voters. That platform did not deliver for many of those voters, who stayed home in subsequent elections costing the Democrats Congress in 2010, the Senate in 2014, the presidency in 2016, 14 governorship's and control of many state legislatures over the last 8 years.
Now it's the Republicans' turn to govern. If Trump delivers the jobs that Red State Americans crave, the Republicans will do well in 2018 and 2020. If those voters see no gains in jobs over the next two years, but their taxes rise while their Obamacare health insurance disappears, we'll see the balance of power shift back to Democrats from Republicans starting in 2018.
Initial financial market reactions
Between 2 AM and 4 AM on the morning of November 9th, US stocks as indicated by the S&P 500 futures fell 8%. That loss was erased by the time regular trading opened at 9:30 EST. From Election Day through Friday, December 2nd, The S&P 500 gained 2.45%, up 1.5% on the quarter and up 9.5% on the year (our year end forecast is up 10.0%)
For every disappointed Clinton supporter, there was a jubilant Trump supporter. Sell and buys between those investors cancelled each other out. More importantly, US investors were net sellers of stocks August through Election Day, all that cash flooded back through November. Whether you liked the outcome or not, at least you knew then answer.
Financial service stocks have done extremely well, up 17.4% in November. Investors expect that Trump and Republicans will dismantle the safeguards put in place after 2009. Good for bank profits, not so good for average American who could really use those safeguards.
Industrial stocks have done well, anticipating more spending on infrastructure.
Energy stocks have done well - less because of the election, more because OPEC acted recently to cut production. West Texas Oil is now $51.68/barrel, well above the January low of $29.04.
Healthcare stocks are down 5.1%, anticipating turbulence in the health insurance markets as Obamacare is wound down or replaced.
Technology stocks are down as money rotates out of Facebook (down 13.5%) Amazon (down 12.6%), Netflix (down 9.3%) and Google (down 8.1%)
Large cap stocks gained 3.9% in November and are up 10.0% for the year. Small cap stocks gained 11.1% in November and are up 18.0% on the year. Generally speaking, when small caps out perform large caps it means that the economy is overheating. The Fed will increase rates until the economy slows. Often a recession occurs within 1-2 years.
US stocks gained $569.3 billion in market value. However, the US bond market is down sharply, losing over $1 trillion with the entire yield curve shifting 0.5% higher, on the expectation of higher inflation. The ten year is now at 2.45%, up from 1.36% earlier this summer. Bond yields were abnormally depressed this summer as uncertain stock investors parked their cash in bonds, so current yields won't depress economic activity (yet.) It's reasonable to expect the Fed to raising rates 0.25% in December, a couple more times in 2017.
Despite all the media coverage of stock market records, stock prices are barely higher than in July, while bond prices are down. Our investments in bonds skew to short term maturities, which are less affected by rising rates, but are still down this past month. Clients in balanced portfolios should expect only modest gains on their November statements.
For the next 3- 6 months, we're not making substantial changes to our portfolios until we have a clear sense of spending priorities and tax policy for the new administration. We will present a preliminary analysis in our year end commentary.