The debate continues to rage around how stocks and the economy would react to a hypothetical Elizabeth Warren victory in the general election next year.
The fact that somebody, somewhere, is having this conversation each and every day is likely a testament to two things.
First, people are nervous about making assumptions when it comes to whether Warren is electable. Sure, you can find plenty of soundbites from folks claiming she can’t win, but if everybody really believed that, then why all the hand-wringing about her momentum? I seriously doubt whether the squirrels in my backyard possess the organizational skills and the sense of purpose necessary to lay siege to my house and claim it for themselves, so I don’t spend a lot of time thinking about it. But you can scarcely go a day without somebody on business television talking about Warren (Jamie Dimon chimed in on Tuesday, for example) and fearmongering about how bad her policies would be for equities and the economy.
Second (and this is a related point), 2016 proved that Americans are susceptible to a populist narrative that promises to restore prosperity to a “forgotten” middle class which has fallen victim to a system that doesn’t work for them. Donald Trump peddled the same message, but his narrative (that a billionaire with a long history of narcissism and flaunting his wealth) suddenly decided to care about flyover America was always far-fetched.
Warren, though, actually does care. It’s entirely possible that her obvious passion and righteous indignation at the plight of the everyman resonates with some of the same voters Trump duped in 2016, only to sell them down the river with corporate tax cuts and policies that disproportionately benefited the wealthy.
In any case, given the hysteria, we thought readers might be interested in a handful of simple election charts from Goldman. The first set just shows the median return for the S&P since 1932 indexed to 18 months prior to the vote (left pane) and the trajectory of valuations around elections (right pane):
What’s interesting there is that if the combination of Warren worries, a decelerating economy and a delirious Trump (one can only imagine how he’s likely to behave in 2020 if he survives the impeachment inquiry) conspire to undercut stocks materially in the lead up to the vote, it would mark a break with historical precedent.
As far as the potential impact of any effort to roll back the tax cuts, the following charts won’t be “news” to anyone, but they are a handy reference guide if you just need something to point to and say “here’s the boost from Trump’s corporate handout”:
In the same vein (or, actually, on the flipside), here’s what happens to Goldman’s 2021 S&P EPS outlook assuming a higher effective tax rate:
Clearly, that would not bode particularly well for stocks all else equal, but when you consider all of the above, you should ask yourself two questions (and try to suppress your own predisposition to being skeptical towards progressive policies for a moment):
- What do you imagine the impact on consumer spending would be if healthcare were to become free?
- What do you imagine the impact on household formation and consumption would be if student debt were wiped away?
Now consider that the people who would really “feel” (so to speak) the impact of those policy changes also have a higher propensity to spend. Then consider the US economy lives and dies by the consumer.
Something to think on.