Factors affecting the U.S. stock market up to and after the election.

1. Political and market thoughts
David D. Burrows
President, Hudson Advisor Services, Inc.
August 26, 2016

2. Potential political impact on markets and economy
Clinton wins (75% probability)
 A Clinton win would most certainly result in continued moves along a Socialist path, including:
• Higher taxes on wealthy
• More spending on infrastructure
• Increasing federal debt burden
• Potential earlier negative impact on social security, Medicare and Medicaid
• Obamacare train wreck replaced by federal single payer healthcare system
 However, there could be mitigating factors, such as:
• Dysfunctional congress unwilling to go along with Clinton plans
• A Clinton “tack back” to center after winning over the left wing (probably unlikely)
• Indictment of Clinton for various possibly criminal offenses (also unlikely
Trump wins (25% probability)
 A trump win would upend many of the political moves of the last 8 years, including:
• New tax legislation, lowering burden on middle class
• A rational immigration strategy
• More positive corporate and wall street environment
• Obamacare train wreck replaced by better system
 However, there could be mitigating factors, such as:
• Dysfunctional congress (and broken republican party) resists Trump plans
• Increased taxes generally to fund economy (probably unlikely)
• Loss of Senate may balance out ability of House to govern
• Foreign policy – more isolationist view – reduction in trade and GDP growth
Market impact
• Continued slow growth of economy
• Corporate earnings recession or lack of growth
• P/E reset to historical standards of 15X – 15% drop in US Markets
• Negative impact on Europe and Asia – lower imports
• Continued investment by sovereigns in US equities (safe harbor)
• Market levels off and sputters along at 15,000-16,000 Dow
Market impact
• Economy begins to grow at faster pace
• Consumers feel better about jobs – begin to spend more
• Corporate earnings pick up
• P/E reset to historical standards (+) of 18X – market pullback
• Market levels off before increasing due to increased corporate
earnings
• Better relations with major trading partners
• Continued investment by sovereigns in US equities (safe harbor)
We add the following caveats to our thoughts below: 1) This is rank speculation 2) Campaign promises are “DOA” or dead on
arrival, according to John Boehner, so heavily discount what you hear. 3) Presidents do not control the stock market and
democratic legislatures are most often best for markets. 4) Hillary is indebted to Wall St and corporate America, so don’t believe
she will shut them down.

3. • The U.S. market for the year 2016 has been relatively positive, except for the month of January.
• We anticipate that we will end the year up 5-7% overall (S&P 500), barring unforeseen problems (natural or unnatural disasters!).
• The market may rally slightly more for a Trump win than for a Clinton win, but that is not at all certain.
• It is clear that the markets have benefitted tremendously from quantitative easing; yet retail investors are still hoarding cash,
despite the lack of yield. This could mean that stocks will benefit from increased retail demand.
• However, looking at the chart on the following page, we would speculate that the markets continue to be overheated and will
revert to normal P/E ratios when interest rates rise again.
• We are concerned that following a quiet August, the markets may revert to type by pulling back (as they always seem to do) in
September and October.
• What we need to see is greater growth in the economy and less uncertainty about not only the US political situation, but also
economic prospects for the international markets.
Speculations on the stock market – August 2016
Our recommendation for clients is to maintain a conservative asset allocation profile and to reduce
equity exposure somewhat through the election.

4. Shiller CAPE ratio: Cyclically adjusted Price Earnings ration from 1982-2016
What is interesting to me is the upward slope of the ratio in the 80’s until the crash of
2001, followed by either a new normal of 25 P/E or an overheated market. I think it is
fairly clear that quantitative easing has pushed P/E ratios higher and that they will correct
as interest rates rise or earnings increase, should economic growth pick up from its
anemic 2% level.
Data courtesy of Robert Shiller from his book, Irrational Exuberance
.