Back in 2016, Marko Kolanovic predicted Donald Trump would likely win the election.
And that’s not all the “man who moves markets” (among Marko’s many monikers) said about the most shocking election in modern political history. Kolanovic also said ahead of the vote that a Trump win would catalyze a rally in US stocks.
It was “a double out-of-consensus view”, he writes, in a Monday note weighing in on the prospects for macro and markets in 2020. “In retrospect, it should have been straightforward to forecast the positive earnings impact of a massive fiscal stimulus”, he goes on to remark, effectively suggesting that the rest of us should have had no trouble seeing what he saw.
Given his prescient call back then, folks are naturally interested in Marko’s view on the upcoming election, which some believe will find Trump squaring off against Elizabeth Warren or, perhaps, Bernie Sanders.
Kolanovic doesn’t think that’s particularly likely and if it does happen, he says Trump will probably prevail. A centrist Democrat, on the other hand, could be a net positive for US equity markets. Marko being a quant, he’s done some math on this.
Since the beginning of the trade war, analyst after analyst has warned that the White House risked negating the benefits of the tax cuts. After all, tariffs are just taxes, something Trump either does not understand or simply refuses to admit.
For his part, Kolanovic has long bemoaned the extent to which trade uncertainty has undercut US equities. “The estimated cost of the trade war so far is about ~$3T [and] this may be a conservative estimate as many market segments benefited from flight to safety and declining yields”, he said back in June, alluding to the possibility that were it not for the rally in certain safe havens and bond proxies, the broader market might have traded even lower. He drove the point home as follows over the summer:
The market damage is ~100 times the tariffs collected, so it is clearly not making the country richer. The impact of the trade war was particularly negative on segments that were its intended beneficiaries — such as manufacturing (autos, electrical equipment, etc.), smaller domestic companies, steel industry, etc.
Fast forward to Monday, and he takes a different approach to quantifying the deleterious effect of Trump’s protectionism. “In addition to the direct negative impact of tariffs on corporate earnings and specific segments such as farming and manufacturing, there is a larger negative impact from uncertainty and volatility introduced by the policies”, he says, before elaborating:
For instance, market volatility (VIX) in the year before the trade war averaged ~11, and after the trade war started averaged ~16. In an environment of increased uncertainty and volatility, investing is suppressed — be it corporate capital expenditures or investing in financial markets. If one, for instance, assumes that most investors use volatility targeting (implicit or explicit) or expect a certain level of Sharpe Ratio, the trade policy related increase of volatility would imply a ~25% equity discount. This uncertainty likely offsets most of the ~30% earnings growth driven by the fiscal stimulus.
Ultimately, Marko reiterates a familiar point – namely that “all of the benefits of tax cuts were undone by the trade war initiative”.
What does that mean for the upcoming election? Well, for one thing, it means that Trump will be more inclined to avoid further escalations. But beyond that, Marko notes that because the “uncertainty discount” documented in the excerpted passage above “is equal to or larger than the benefit of corporate tax cuts to the equity market”, the read-through for a centrist Democrat is that as long as taxes aren’t increased beyond what they were during the Obama-Biden years, “the effect on the equity market would likely be a net positive”. You’d have less volatility, higher investment (as uncertainty is reduced), more capex and a reversal of the negative trends in global trade.
(Remember, plunging CEO confidence is a hot topic these days and while election jitters are in part to blame, the seemingly intractable trade war is at least in part responsible for lackluster business investment.)
And how about a progressive left Democrat? What happens to markets if the primary hands Warren or Bernie the nomination, and somehow, Trump ends up losing?
Marko doesn’t mince words, although he doesn’t resort to bombast either (he never does – his cadence is always measured). “The final possible outcome is a progressive left Democratic candidate that would clearly be a significant downside risk for the market”, he says, before explaining why, in his view, that’s an unlikely outcome.
For one thing, US elections hinge on swing voters and swing states, many of whom voted for Trump and are “highly unlikely to swing from far right to far left”, Kolanovic says. Additionally, he thinks that in the event a progressive candidate does end up in the general, they will probably lose.
Ultimately, Kolanovic thinks that either Trump will win, or a centrist Democrat will. Either way, the US elections aren’t likely to be a risk that should keep investors up at night, let alone out of the market.