President Trump’s reelection in 2020 would be far worse for markets than an Elizabeth Warren win, according to Renaissance Macro Research. Though that flies in the face of conventional wisdom on Wall Street, a closer look at what a potential Warren administration could actually achieve under a Republican-dominated Senate shatters investors’ rosy view of what a second Trump term would mean for their portfolios.
There’s no disputing the fact that the Massachusetts senator is advocating for massive change on Wall Street. The game-changing proposals that she has come up with threaten how Wall Street operates – from the Stop Wall Street Looting Act, which would make it harder for private equity firms to make money when they buy a company that fails, to Medicare for all, which could potentially hit the private insurance industry.
Not to mention her wealth tax which has led to public criticism from billionaires like Bill Gates, Jamie Dimon, and Leon Cooperman. Some went as far as to predict that the stock market would drop 25% if she were to win the White House.
Here’s a reality check, though. If Warren wins the Democratic nomination, and is elected president, Mitch McConnell will most likely still be the Senate Majority Leader. And, according to Neil Dutta, head of U.S. Economics at Renaissance Macro, Washington dysfunction will prevent any of Warren’s bold plans from becoming law because Senate approval will be nearly impossible to come by.
President Obama similarly had to contend with Capitol Hill dysfunction most notably when his nominee for the Supreme Court Merrick Garland was blocked by McConnell; McConnell (R-KY) refused to hold a vote on his nomination in 2016.
Trump is the bigger threat to markets
Many investors think Trump is the stock market’s friend in part because stocks have been trading at record highs under his administration. But a reelection means that he can get bolder with his trade war with China and stir up more trouble for markets by imposing even more tariffs, says Dutta. “I’m not sure why Trump is assumed to be the market’s best friend. If he wins... Trump may feel vindicated in dialing up the heat on China.”
Renaissance Macro did an analysis of the impact of negative China trade war news on the S&P 500. “On days of negative trade news, the market has declined cumulatively around 400 points, if you tally up all those days. That’s a substantial amount,” says Dutta.
Though China’s economic growth has been hurt by the trade war with the U.S., China still has the upper hand in negotiations because President Xi Jinping faces no term limits. By contrast, Trump is restrained from escalating the conflict further by the impact of tariffs on the economy, markets, and his poll numbers. If Trump gets reelected, he’s no longer obligated to factor that in.
“There have been many periods where trade has been a substantial headwind whether it’s been with China, Europe... If the news gets worse then you can see similar declines, maybe another 200 points, maybe another 300 points. It depends on how long Trump wants to keep it going,” says Dutta.
“The strike price on the Trump put, this idea that Trump is going to come in and save the market if it gets too low, the strike price on that is probably going to be substantially lower in the second term than it is right now,” he says.
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