If Trump or Sanders lay claim to the U.S. Presidential nomination for their party investors should watch out. Their success “argues for lower market multiples if they look like they have a decent chance of securing their respective nominations and winning the White House.” Here’s why.
The election of Republican presidential hopeful Donald Trump or Democratic aspirant Bernie Sanders could be worse for stocks than is currently being considered says a Cornerstone Macro research report by Andy Laperriere, Roberto Perli and Melissa Turner…[which] points out that if either Trump or Sanders get elected, they are likely to use powers available to them that are traditionally avoided…
“Investors are accustomed to Presidents who play between the 40 yard lines,” they wrote. “Donald Trump and Bernie Sanders aren’t likely to be so constrained. If either of them emerges as the nominee of their respective parties… market multiples should contract.”
There is significant and seeming unilateral power a U.S. President has regarding trade policy. If Trump or Sanders took office they might first declare China a market manipulator or threaten to withdraw from trade agreements such as NAFTA.
The “normal” route to handle trade disputes is an investigation by the Commerce Department. If an unfair trade practice is discovered, the International Trade Commission (ITC) determines if there was harm to a U.S. industry and then the President can impose countervailing duties, the report noted. However, seldom used emergency measures exist.
- There is a law on the books called the International Emergency Economic Powers Act (IEEPA) that gives the President extremely broad authority to block trade entirely if he declares a national emergency. This happened under former President Ronald Reagan with Nicaragua as well as under Jimmy Carter with Iran. “Suppose a President Trump declares the porous border with Mexico a national emergency and threatens to cut off trade unless Mexico pays for a wall. He could do so under IEEPA.”
- The President could also invoke Super 301 authority, which allows the administration to identify nations with unfair trade practices and take steps to stop those unfair practices.
- Section 201 says even if no unfair trade practice is found, the President can impose tariffs or limit imports if the ITC finds injury to a U.S. industry.
- The power of the presidency is further on display in section 232, where the president could determine that certain imports pose a national security risk and limit them.
- The President could also greatly limit foreign investment in the U.S. by tightening the standards under the CFIUS (Committee on Foreign Investment in the U.S.) process. All this can happen without Congressional intervention.
It doesn’t matter what party wins if Trump and Sanders are in the mix
Other areas where Presidential authority could come into play with or without various levels of Congressional oversight, the report noted, include:
- breaking up the big banks,
- interfering with the independence of the U.S. Federal Reserve,
- altering U.S. energy policy,
- instituting a labor agenda and
- allowing drug imports from Canada.
The anti-establishment Trump and Sanders might be from different parties, but they both are concerning to investors.
“We strive to stay neutral – but with our analyst hat firmly on our head – we see it as a fact that Trump is dangerously ill-informed concerning public policy, particularly issues related to national security,” the report opined. “A big part of Trump’s appeal is the perception by his supporters that he is not going to let constitutional niceties (in other words, the rule of law) get in the way of his agenda. There is evidence they are right.”
If Trump or Sanders lay claim to the U.S. Presidential nomination for their party, investors should watch out. “Both Trump and Sanders are demagogues,” the report said. Their success “argues for lower market multiples if they look like they have a decent chance of securing their respective nominations and winning the White House.”