Don't let politics cloud your outlook for the economy or markets.
As Donald J. Trump marches toward the GOP nomination — with a resounding victory in Arizona’s winner-take-all primary Tuesday and with favorable states like New York, Connecticut, and New Jersey on the horizon — the world is responding with a collective freakout.
Conservatives are considering a third-party candidate, the U.K. Parliament debated banning Trump, and now financial analysts are predicting that trillions of dollars in stock market wealth could be lost should the real estate mogul occupy 1600 Pennsylvania Ave.
Investors, already queasy due to slumping oil prices and a weakening global economy, do not need another shock to the system any more than they need ridiculous claims that the stock market will crash to financial crisis levels simply because someone is or isn’t elected president.
Why do some experts think the potential election of Trump — an ardent capitalist with legions of friends on Wall Street — would wreak havoc in the market?
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The most recent warning of an epic market crash comes from Wedbush analyst Ian Winer, who bases his assertions on some of Trump’s economic proposals. They include Trump’s call for significant tax cuts on high earners coupled with increased military spending.
Winer, talking with CNBC last week, said the U.S. economy would have to grow “somewhere between 8 and 9 percent…just to make us neutral.” That means greater deficits and increased financing costs, even as the Federal Reserve will likely keep rates below historic levels for the near future.
Add to that Trump’s plan to deport undocumented immigrants, which comprises roughly 11 million people. This mass exodus would not only be expensive to execute, but also costly to the bottom lines of companies that depend on cheap labor. Replacing undocumented immigrants with American citizens would, likely, increase payroll and cut into profit margins.
Lastly, he argues that Trump’s plan to impose tariffs on trading partners such as China and Mexico would simply make imported goods more expensive for average American consumers, thereby limiting available dollars to spend elsewhere.
Put together these policies would cause such economic hardship, Winer claims, that the price/earnings ratio of the S&P 500 would drop to nearly 11, and “that’s how you get to 1,000 on the S&P,” Winer says. The S&P 500, right now, is slightly above 2,000. Hence stock market Armageddon.
So, why exactly is Winer wrong?
Well for one thing, there is no complex algorithm he’s relying on to conclude that rising deficits, 11 million deportations, and rising tariffs must equal a market P/E ratio of 11. The stock market simply doesn’t work that way. It’s merely his guess.
Also, even if Trump is elected, there’s no guarantee he will be able to persuade Congress to take an axe to tax rates or dramatically increase spending on military (however that manifests itself), even if the GOP retains control of both chambers.
He has found just as much support for deporting 11 million people, as he has convincing Mexico to pay for a “beautiful” wall along the border, which is to say, none at all. And while anti-free trade rhetoric has found sympathetic ears among the electorate, there’s little chance the country will turn to isolationist economic policies as the world becomes only more integrated.
Of course, this could be Winer’s point.
He might simply be putting another number on Trump’s increasing list of impractical positions to illustrate its implausibility and potential harm. Fair enough. But using stock prices to make this point is problematic.
After all, since Trump won the New Hampshire primary on Feb. 9 and took the delegate lead in the GOP, the stock market has climbed 10%. So it’s difficult to assume that the stock market — which is supposed to be a forward-looking gauge — would all of a sudden collapse should Trump win it all.
Which brings us to a key point: Investors are better off if they don’t let their politics interfere with their investing behavior. (The same is true for conservatives who fear a Clinton or Sanders presidency.)
When it comes to the short-term performance of equities, no one knows what’s going to happen. Little did anyone expect that in 2015, 401(k)s would be battered by the confused Shanghai exchange.
Don’t sell your investments and pile cash underneath your pillow if Trump wins the next few primaries, the nomination or even the election. This too shall pass.