US Presidential Elections: The Home Stretch PERSPECTIVES Key Insights Paresh J. Upadhyaya Senior Vice President, Director of Currency Strategy, US Ò At this point in the election cycle, the US presidential race is Clinton s to lose, with a series of fundamental, quantitative and subjective indicators pointing to a likely win. Ò While a Trump win is still possible, both candidates face a number of challenges that could derail their campaigns. Ò Clinton enjoys a sizeable lead in the Electoral College, which reflects a changing landscape in terms of political demographics. Ò The markets have priced in a Clinton win. Both the fixed income and currency markets remain vulnerable to a tightening in the polls. As the US presidential election heads into the home stretch, we examine the state of the horse race between Democratic candidate Hillary Clinton and Republican (GOP) candidate Donald Trump, the challenges faced by the candidates, the Electoral College outlook and finally the financial market implications. The Horse Race: Clinton s to Lose As of August 25, 2016, all fundamental, quantitative and subjective indicators point to a solid Clinton win. Fundamental Historically, the approval rating of the outgoing President has correlated strongly with the ultimate success of that corresponding party s presidential candidate. Our analysis indicates that this correlation has failed only twice since 1960 (Table 1). Currently, President Barack Obama s approval rating is at 53%, the highest level in his second term. At this level, Obama s approval rating should favor Clinton s election. Table 1: Popular Incumbent Presidents Have Supported Same-Party Candidates Year Outgoing President GOP Candidate Democratic Candidate Approval of Outgoing President Election Result (Margin of Outgoing Party) 1960 Eisenhower (R) Nixon Kennedy 59% -0.2 1968 Johnson (D) Nixon Humphrey 43% -0.7 1976 Ford (R) Ford Carter 53% -2.1 1988 Reagan (R) Bush I Dukakis 56% 7.7 2000 Clinton (D) Bush II Gore 58% 0.5 2008 Bush II (R) McCain Obama 25% -7.3 2016 Obama (D) Trump Clinton 53%? Source: Pioneer Investments, CornerstoneMacro, as of September 2016
Quantitative Historically, the polls haven t had any meaningful predictive qualities until Labor Day weekend. Polls taken on Labor Day weekend have accurately predicted the winner of the popular vote in every election since 1996 and the ultimate winner in all but one (2000), when Al Gore lost a close race to George Bush (Table 2). So far, Clinton has a 3.9% lead over Trump, the largest for a non-incumbent and non-vice presidential candidate since Dwight Eisenhower s 1952 inaugural campaign. Table 2: Leader on Labor Day Wins The Popular Vote Labor Day Actual Clinton (1996) 14.5 8.4 Bush (2000) -4.0-0.5 Bush (2004) 4.5 2.4 Obama (2008) 4.7 7.3 Obama (2012) 1.0 3.9 Clinton/Trump (2016) 3.9? Source: Pioneer Investments, as of September 2016 Subjective All year long, market betting sites have been forecasting a Clinton win. By and large they have not forecasted this probability as lower than 60% since the beginning of the year. Currently, PredictWise is anticipating a 75% probability of a Clinton Presidency with only a 25% probability of a Trump win. There are a number of sophisticated political websites, such as FiveThirtyEight, that produce their own political probability models, taking into account polls and economic conditions. FiveThirtyEight is predicting a Clinton victory with a 68% probability against 32% for Trump. Challenges for Each of the Current Candidates Hillary Clinton s Challenges There are three areas that are likely to act as road bumps along the way for Clinton. How she navigates these potential obstacles will determine whether the campaign veers off course or stays on track in the polls. 1. Complacency With our poll of polls indicating a comfortable Clinton lead of 3.9%, the campaign needs to remain vigilant and stay on the offensive. She will also need to focus on grass roots organization and get out the vote efforts. 2. Email Scandal If Clinton is not careful, the email scandal can become a slow-drip scandal that could further erode trust and honesty among voters, potentially crystalizing enough discord to lead to defeat in November. 3. October Surprise Given that Clinton is the ruling party s candidate, she could be blamed for any potential downturn in the economy or any negative repercussions from Obama s domestic or foreign policy initiatives. Donald Trump s Challenges Can Trump win? Yes, but it won t be easy. With fundamental, quantitative and subjective indicators all suggesting a loss, there are three things he needs to do to vastly improve his chances of winning the presidency. 1. Stay on Message Trump needs to continue to use a teleprompter that will ensure he stays on message and minimize the likelihood of going off topic, which has gotten him into trouble on numerous occasions. 2. Demonstrate Grasp of Policy Polls indicate Americans overwhelmingly do not believe Trump has the experience to be president. The most recent Gallup poll reveals that Americans believe Clinton has the experience to be President by a massive 62% to 31% margin over Trump (5/18-22 poll). Trump needs to demonstrate that he s serious and thoughtful about a range of domestic, economic and foreign policy issues. Obviously, the poll highlights low expectations on this subject matter, therefore it won t take a lot to beat them. The upcoming debates will be the perfect venue to turn around perceptions. 2
3. Emphasize Strengths He should play to his strengths versus Clinton. There are two areas where Trump beats Clinton: the economy, and as an agent of change. The latest NBC News/Wall Street Journal poll (8/3/16) highlights that Americans slightly favor Trump over Clinton on dealing with the economy by 46% versus 42%. The poll also reveals that Americans strongly believe Trump, compared to Clinton, will change business as usual in Washington D.C. by a thumping 48% against 26% margin. Electoral College: Clinton Enjoys Sizeable Lead As former Vice President Al Gore found out in 2000, it is the Electoral College that elects a president and not the popular vote. While Clinton leads in opinion polls, our analysis of the Electoral College Map indicates a decisive Clinton win (Chart 1, next page). I project Clinton winning 359 electoral votes, comfortably ahead of the 270 required to win the presidency, while Trump wins 179 electoral votes below Mitt Romney s 2012 result of 206. To get a better sense of regional support for the two candidates, an ABC/ Washington Post poll reveals that Clinton is outperforming Obama s 2012 reelection campaign in three out of the four US regions Northeast, South and West (Table 3). Changing demographics, Trump s immigration policy and his cornerstone plan to build a wall between Mexico and the US has antagonized Latino Americans. As a result, the West has seen a swing of 16% in favor of Clinton compared to the same period in the 2012 election, and has pushed Colorado and New Mexico into the safe Clinton camp while Arizona has become a lean Clinton state. Surprisingly, the GOP stronghold of the South has seen a 12% swing in favor of Clinton compared to the 2012 election campaign, due to changing demographics (rising Latino population and inward migration of African Americans) and the perceptible change in college-educated white voter s preferences. The only region where there is a swing of 4% in favor of Trump over Romney s performance in 2012 is the Midwest. Trump s immigration and trade policies are resonating with white blue-collar voters. Table 3: Clinton Outperforming Obama in Three out of Four Regions 2016 Poll Northeast Midwest South West Overall Clinton 58 49 46 54 50 Trump 33 44 47 40 42 Margin 25 5-1 14 8 2012 Poll Northeast Midwest South West Overall Obama 52 48 41 47 46 Romney 40 39 54 49 47 Margin 12 9-13 -2-1 Northeast Midwest South West Overall DEM 6 1 5 7 4 GOP -7 5-7 -9-5 Swing 13-4 12 16 9 Source: ABC/Washington Post 8/22-25/2012 and 8/6/2016 polls Our Electoral College Map (Chart 1) shows how the landscape has changed over the years. Clinton has solidified the traditional democratic base of the Northeast and West Coast where all those states are out of reach for Trump. On the other hand, the Midwest is far more competitive with many traditionally Democratic states, such as Michigan and Ohio, barely tilting to Clinton. The Southwest is slowly becoming more hospitable to Democrats as New Mexico, Colorado and Nevada are becoming more Democratic. Arizona has become a hotly contested battleground state. The South is also changing, as the map is no longer a solid deep red as it has been for the last 20 years. North Carolina and Florida are tilting Democratic while Georgia, South Carolina and even Mississippi are leaning Republican. 3
Chart 1: Electoral College Map Clinton Has a Solid Edge Clinton 359 179 190 64 105 55 12 112 Trump 11 MA 4 RI 7 CT 14 NJ 3 DE 10 MD 3 DC Split Electoral Votes ME 3 NE 3 1 1 1 Source: Pioneer Investments, 270 to Win, as of August 2016 Financial Market Implications The markets are essentially pricing in a Clinton win; therefore risks remain skewed to the downside if there is an uptick in Trump poll numbers and a change in the expectation of a Clinton win. Equity Markets Pricing in a Clinton Win The S&P 500 Index is pricing in a Clinton victory, according to Strategas Research Partners. They have developed Democratic and Republican portfolios to identify companies and/or sectors that stand to gain or lose the most from the election. Their analysis reveals that the Democratic portfolio has nearly doubled the Republican portfolio s performance year to date, which is consistent with our fundamental, quantitative and subjective indicators pointing to a Clinton win. There were a few interesting findings. It appears the market is perfectly pricing in a boost to infrastructure spending, some form of corporate tax reform and more Democratic health care reforms. On the other hand, the market is not pricing in potential changes in energy and climate policy. These stocks have outperformed and could be vulnerable to a sharp correction. The pharmaceutical and biotech industries have underperformed due to concerns that a Clinton administration would take action to limit drug prices. Given Trump s low probability to win the election, the Republican portfolio has underperformed. Unsurprisingly, certain sectors such as defense, consumer discretion, consumer staples and utilities, in the Republican portfolio have also performed subpar. Given low expectations of a Trump win, it could create upside opportunities for the Republican portfolio. 4
Chart 3: Democratic Portfolio Outperforming Republican Portfolio Strategas 2016 Democratic Sweep Relative To The Republican Sweep & Clinton Pres. Probability (100 = 10/31/2015) 117 115 113 80 75 70 Clinton Probability of Winning, (RHS) Democratic Portfolio Relative to the Republican Portfolio, (LHS) Ratio 111 109 65 60 % 107 55 105 50 103 Jan 2016 Feb 2016 Mar 2016 Apr 2016 May 2016 Jun 2016 Jul 2016 Aug 2016 45 Source: Strategas Research Partners. Last data point 8/23/16. Fixed Income Markets Priced to perfection; vulnerable to a tightening in polls Fixed income markets have enjoyed a strong bull market since Q1 due to the backdrop of sluggish global growth, benign inflation and stimulative G4 monetary policy that led to inflows into higher risk, higher yielding assets, such as high yield and emerging markets debt. If polls tighten and Trump gains on Clinton, investors may grow nervous about Trump s uncertain agenda, leading to a safe haven bid for Treasuries and a pullback in riskier sectors of the fixed-income markets. Currency Markets Should begin to focus more closely on the elections now Currency markets have been driven by improved risk appetite and a more protracted Fed tightening cycle that has kept the US dollar (USD) in a relatively tight range against G10 currencies, but on a weakening bias against most emerging markets currencies. However, if polls do tighten, there is a risk of a more substantial USD decline. The USD remains vulnerable to any signs of protectionism and reversal of global trade pacts. These are some policies Trump has promised to implement if he wins. Unless otherwise stated, all information contained in this document is from Pioneer Investments and is as of September 6, 2016. The views expressed regarding market and economic trends are those of the author and not necessarily Pioneer Investments, and are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading on behalf of any Pioneer Investments product. There is no guarantee that market forecasts discussed will be realized or that these trends will continue. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested. This material does not constitute an offer to buy or a solicitation to sell any units of any investment fund or any services. All investments involve risks. You should consider your financial needs, goals, and risk tolerance before making any investment decisions Pioneer Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies. Date of First Use: September 8, 2016. 2016 Pioneer Investments us.pioneerinvestments.com 29742-00-0916