After 11 Republican, 6 Democratic debates, caucuses and primaries in 18 states, the delegate count for Republicans and Democrats is as follows: Trump 329 (1,237 needed to win nomination), Cruz 231, Rubio 110, Kasich 25, Clinton 1058 (including 458 super delegates, 2,383 needed to win nomination), Sanders 431 (including 22 super delegates).
Last July we wrote:
"On the Republican side - comedy and chaos. Jeb Bush maintains a slight edge at the top of the GOP polls (with 15%.). Trump (the candidate du jour) is at 12%. We wrote in March, 'the Republican primary process will operate like a circular firing squad.' That situation is worsening by the day. Where is the candidate with the stature of Reagan, Eisenhower, or even Nixon?
On the Democratic side, Hillary Clinton's lead over other candidates slid from +60% a month ago to just +48.5%. Sanders attracts Democrats disaffected by Clinton's centrist bent and Wall Street connections and could win a couple of primaries. We doubt his campaign will mount a serious threat to Clinton. Joe Biden may yet step into the ring, but too little, too late.
Our forecast as of July 2015:
- Jeb Bush is the Republican nominee
- Hillary Clinton is the Democratic nominee
- Personality will matter more than issues
- Clinton is the eventual winner
- Both House and Senate remain in Republican hands in 2016
- The political gridlock we've seen since November 2012 prevails through at least 2018"
Two surprises so far: Jeb Bush never converted money and connections into delegates and withdrew after South Carolina. Donald Trump, who we dismissed as a circus clown last summer, is poised to be the Republican nominee. Already clients are asking, "Will the stock market collapse if Trump becomes President?"
Could Trump win?
Since June 2015, the conventional wisdom about Donald Trump he would soar in polls as the media introduced him to voters, then fall as voters found him vulgar, racist, misogynistic and not quite the businessman he portrays. Ben Carson, for example soared on his characterization as an American success story (from broken home in Detroit, to Yale, to University of Michigan medical school, evangelist) then floundered on his obvious lack of qualification. Since June, the conventional wisdom has been 100% wrong about Trump. The more establishment Republicans like Romney, McCain, the National Review attack Trump, the more his fans like him.
What is different? In the Music Man, con man "Professor" Harold Hill identifies the new pool hall in town as a vortex of vice and seduction for the young boys of River City, Iowa. His solution: instruments and uniforms for a boys' marching band. He'll collect the money and disappear before the town folk realize he can't teach music. Hilarity ensues!
Trump (and Bernie Sanders) identified a vast reservoir of civil discontent in the United States. Over the last two decades, coastal "elites" grabbed an ever larger share of the American pie. In the center and south of the country, blue collar high school educated Americans experienced a dramatic decline in income standards, which actually shows up in higher mortality statistics for white men. Trump says, "Vote for me! I'll throw out immigrants that take your jobs and block Chinese imports that shuttered your factory. Also, it's OK to attack people who are 'other.'" That strategy shocks country club Republicans but sure has resonated with primary voters, who turn out in record numbers for Trump.
Rubio, the establishment favorite after Bush, can't break out while Kasich siphons off support of moderate Republicans. If Rubio doesn't win Florida, he is out. Cruz, second in delegate count after Trump, won't give up his presidential dreams even though he is likely to underperform Rubio in upcoming primaries. Kasich will stay in the campaign at least through Ohio. Trump WANTS all three rivals to stay in the race. Over the next weeks, primary delegate assignments shifts from proportional to winner take all, which means that Trump can win all of the delegates with as little as 35% of the actual vote.
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. We like prediction markets more than polls. In a prediction market, people place money on the candidate they think will win, not necessarily on the candidate they would actually vote for. At PredictIt Clinton leads with a 57% chance of winning, followed by Trump-28%, Sanders-10%, Cruz 8%, Rubio 5%. At PredictWise, Clinton has a 94% chance to win the Democratic nomination, Trump 73% on the Republican side. In the general election, a Democratic candidate is favored at 66% versus 34% for the Republican candidate. The odds still favor Clinton, but prepare for another eight months of mudslinging.
The United States WILL survive this. In 1968 Americans rioted in 100 cities and engaged in a pitch battle with police during the Democratic National Convention in Chicago. In 1860, seven slave states seceded to form the Confederate States of America. The civil war that followed took the lives of 650-850,000 Americans, about 2% of the population at the time.
The nature of the next administration
We project that a Clinton administration would be an extension of the Obama administration and the William Clinton administration. Clinton seems inclined to make incremental changes in the tax code and structure of the economy, which is why the Democratic base remains unenthusiastic about her campaign. With at least the House controlled by Republicans, legislation would remain in gridlock. Gridlock, by the way, is not bad for stocks, which gained 235% during the first Clinton administration, 142% during the Obama administration.
A Rubio administration would be an extension of the George W. Bush administration, tax cuts for the 1% wealthiest and corporations, soaring budget deficits, a more interventionist foreign policy, one party White House and Congress. Stocks declined 35% during the 8 years of George W. Bush, gained 57% during the 4 years of George H. W. Bush.
A Cruz administration would look like a Rubio administration, but with an aggressive roll back on civil rights and abortion rights.
Trump would (of course!) eliminate the inheritance tax, slash tax rates for the 1% wealthiest and corporations, impose substantial tariffs on imports. Herbert Hoover was the last "businessman" to gain the presidency. A mining engineer by training and former Secretary of Commerce, Hoover became president just before the stock market collapse of 1929. Hoover responded by boosting personal income tax rates from 25% to 63% and raised import duties to record rates to offset a sharp decline in tax revenues (a balanced budget was deemed more important than deficit spending to boost demand.) Stocks fell 89%, did not make new highs until 1954. Trump also has the most aggressive foreign policy prescription, stating that he would order the US armed services to commit war crimes in pursuit of ISIS terrorists.
Do we need to change our investment strategy?
Not yet! So far, the US stock market discounts the probability of a Trump win. On Super Tuesday, a day when Trump swept 7 of 11 states, the Dow Industrials jumped over 300 points. The rally, already three weeks long, continued through Friday, leaving the S&P 500 down just 1.7% on the year after being down 10.5% on the year three weeks ago. The obvious question: is the market rallying because Trump is doing well? No. The stock markets are still reacting to the price of oil, which touched $26/barrel in January, but rallied back to a recent $35.92. Supply is still high, but US rig count continues to fall, which means US oil production will slow sharply in 2017-18. Even with new production coming online for Iran, aggressive pumping by Saudi Arabia, Iraq and Russia, the trend remains that supply will continue to fall relative to demand. If so, price of oil could rise to over $50 by year end 2016.
For now, a stable oil market lets investors feel more confident about buying stocks. The Chinese stock market is still doing poorly, down 18.8% YTD on the Shanghai, 26.1% on the Shenzhen, both down over 40% from last summer. However Western investors who obsessed about these markets last August lost interest in the "China slowdown" story this year. Meanwhile, corporate earnings for the latest reporting cycle are down but not as badly as feared, measures of economic output in the US are up, we continue to get good news from labor markets, Fed policy to raise interest rates is "go-slow" and finally, stock valuations are on the bargain side. So much to worry about, but our decision 5 weeks ago to go fully invested paid off for our clients.