Pricing in a Clinton Victory

November 07, 2016, 11:55 am ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Unless you have been completely ignoring financial markets lately, you now know that Wall Street definitely favors Hillary Clinton.  Most of us knew this before the last week's events, but very few could quantify that ahead of what happened recently.

Given what has happened, it is important for us to understand why Wall Street favors Clinton.

There is a material difference between what Clinton has proposed and what Donald Trump has proposed, and that's asset based liquidity.  Namely, Wall Street believes that Hillary Clinton will continue to support asset prices immediately, she will continue to favor stimulus programs, and the tax and spend initiatives she has laid out, although unlikely to result in longer term growth, would not materially hurt the market immediately.

On the other side of the fence, Donald Trump is not in favor of fabricated growth, and it is exactly that which has taken the S&P 500 to 24 times earnings with subdued forward looking growth rates, a relationship that makes asset prices look expensive.

The reason wall street favors Hillary Clinton is not because she has the best long-term economic policy, but it is because she will continue to support stimulus efforts and so long as she does there will be a fabricated bid for the market, and for bonds and real estate for that matter, that would not otherwise be there.  Wall Street prefers Clinton because Clinton supports fabricated growth, and fabricated growth will keep the stock market from declining immediately.

In terms of policy, a tax and spend policy does not create long-term economic growth but instead it actually creates long-term constraints with only minimal immediate positive influence.  Governments do not invest their money in moneymaking ventures, but instead in infrastructure and temporary projects which ultimately require more investment without producing returns, but businesses do it differently.

When tax rates decline and businesses have more money to invest, they invest in ventures that have the ability to grow and earn more money, and therefore the probability of realizing long-term growth increases vs. what governments might do with that same money.  Where governments would tax to invest in projects that would not create growth themselves aside from temporary job creation to complete the project, businesses would invest in ventures that would earn money, taxable income streams, and longer-term jobs.

Although Wall Street may prefer Hillary Clinton given the immediately rich looking nature of the stock market and the likelihood she has at supporting fabricated growth, we should not misconstrue that.  Where Wall Street investors may very well favor Hillary Clinton, at least this Wall Street economist does not believe in the efficacy of long-term tax and spend policy.  There is a material difference between immediate asset price perceptions and long term economic growth prospects under a tax and spend policy, and Wall Street favors Clinton now because her policy would not be immediately negative to asset prices, but.  wall Street traders, who are largely the reason the market has fluctuated so much recently, are almost always short sighted, so after a honeymoon their perceptions can change.

It certainly seems, however, that Wall Street is now pricing in Clinton Victory.

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