Election 2016: The Year Of The Fourth Party Candidate?

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Includes: SPY
by: Eric Parnell, CFA

Summary

This is not an article about political views, but about the upcoming Presidential electoral process and its potential implications for the economy and financial markets.

The winner of the Presidency will be charged with leading fiscal policy and appointing those to oversee monetary policy.

The greater the uncertainty injected into the upcoming election in the coming months, the greater the uncertainty for the U.S. economy and its financial markets.

This is not an article about political views. Numerous other outlets across the Internet landscape are better suited for such discussions. Instead, this is an article about the potential uncertainty for the global economy and financial markets that might arise from the already eventful Presidential election season where primary voting is scheduled to officially get underway at the start of February. For the person that is elected to lead the Executive branch of government that supports the world's largest economy is charged with, among other things, carrying out fiscal policy for the United States of America. They are also responsible for appointing those that are assigned with carrying out the monetary policy behind the global reserve currency. Thus, the greater the uncertainty that accompanies the electoral process in the coming months, the greater the uncertainty surrounding the subsequent direction of fiscal and monetary policy that will ultimately follow from whoever wins the Presidency.

Before going any further, I am compelled to make one additional disclosure. I currently have no horse in the race for the Presidency at this stage that I have any interest in even trying to support in an article anyway. Frankly, I lack enthusiasm for all of the candidates that are officially running for either party today. Perhaps this will change between now and election day, but I currently rank among the true undecided voters and am open to hearing the thoughts and ideas from candidates on either side of the political aisle, for at the end of the day, I am someone that casts my vote for candidates, not parties.

Where Do We Stand Today?

So with all of that out of the way, where do we stand today just eleven days ahead of the first primary season voting in Iowa on February 2?

On the Democratic side, we have Hillary Clinton leading Bernie Sanders by a margin of 51% to 38% in the RealClearPolitics average of national polls. While certainly a much closer than would have been anticipated, the fact that Secretary Clinton is still ahead remains in line with expectations at the start of campaigning early last year. But with that said, her opponent in self-described democratic socialist Bernie Sanders is closing in the polls in Iowa and is now out in front by double-digits in New Hampshire. And if the events of the 2008 election are any indication, what were once predestined political fortunes can change quickly once the votes start being cast.

On the Republican side, the picture has been vastly more surprising. Businessman Donald Trump is currently way out front with nearly 35% of the vote in the latest RealClearPolitics average of national polls. In a distant second is Senator Ted Cruz at 19% followed by Senator Marco Rubio at 12%, Dr. Ben Carson at 9%, Governor Jeb Bush at 5%, Governor Chris Christie at 3%, Governor John Kasich at 2% and former Hewlett-Packard CEO Carly Fiorina also at 2%. For a GOP party that has a long tradition of nominating the consensus next in line in presidential elections, the current state of the national polls is eye opening, as Mr. Trump can hardly be described as anything close to the conventional Republican candidates that we have seen in the past.

So in summary, we have the original consensus candidate that has a track record of being a more center leaning Democrat leading on one side, and we have a political outsider with a track record of business success and wide ranging views that have not only evolved over time but often reside outside of the traditional mainstream party platform.

Of course, both of these leading candidates have not been without their share of controversy over time. For Mr. Trump, his sometimes controversial positions have caused many in the GOP leadership to either keep their distance or speak out vocally against him. But controversy has recently been placing even greater and potentially damaging pressure on Secretary Clinton, as the ongoing investigation surrounding her e-mail server continues to linger and is potentially building.

This raises some important possibilities to consider. What if Mr. Trump can maintain his lead and win the GOP nomination? And suppose the possibility that Secretary Clinton is eventually forced to stand down because of the e-mail server issue and/or Senator Sanders is able to continue building on his recent voter enthusiasm to capture the nomination? This would leave us with a general election contest pitting an unconventional and sometimes controversial political outsider on the Republican side against a 74-year old self-proclaimed socialist on the Democratic side.

While both candidates may end up being great Presidents, if such a scenario were to come to pass, the reality would remain that this head-to-head matchup would leave a gaping hole in the political ideology spectrum through which one could drive a tractor trailer.

The Implications Of The Extraordinary

Put differently, it does not take much creativity among the politically ambitious to see the opportunity to launch a realistic and potentially even well-funded third party candidacy to try and claim the Presidency as an independent. In fact, the chasm would be so wide and in some cases distorted that it is conceivable to see two or more centrist oriented and potentially less controversial candidates try to make a run at the highest office under such a scenario. In short, the possibility exists that we could have a socialist running as the Democratic nominee, a flamboyant businessman running as the Republican nominee, a moderate Democrat running as a third party candidate and a more traditional mainstream Republican running as a fourth party candidate.

All of this sounds ridiculously farfetched. But so did the S&P 500 Index (NYSEARCA:SPY) trading above 2000 so soon after the financial crisis just a couple of years ago (and just as it sounds equally ridiculous that we could see the S&P 500 Index trading back below 1000 sometime in the next few years). And it is not as though we have not seen such scenarios play out at the state level during Senate, House and Gubernatorial elections over time. For example, in the 2006 senate election in Connecticut, incumbent Joe Lieberman lost the Democratic nomination to businessman Ned Lamont. Senator Lieberman subsequently entered the general election as a third party candidate under the Connecticut for Lieberman party ballot and won with nearly 50% of the vote.

Much has to take place before we see any such scenario even begin to come to pass. But already there are rumblings. For example, news reports surfaced earlier this month that former New York Mayor Michael Bloomberg had commissioned secret polling to assess his chances at a third party run for the White House, and this was done under the presumption that we will see a Clinton-Trump general election contest. One could reasonably anticipate that Mayor Bloomberg would not be alone in testing the third party waters under a Sanders vs. Trump scenario, particularly given the possibility that ample funding would likely be available to support candidates pursuing more conventional and/or centrist views.

The Implications For The Economy And Its Financial Markets

Suppose such a scenario came to pass. Improbable? Yes. But not out of the question given that Mr. Trump is already leading by a wide margin in the polls and Senator Sanders is surging in the polls against a potentially legally troubled Secretary Clinton. Such an outcome playing out slowly and in real-time over the next ten months would likely cast a fair amount of uncertainty over the economic outlook given the implications for fiscal policy. It is one thing for policy makers and forecasters to try to predict the future path of the economy when you have an incumbent party running against a conventional opponent from the other party. But it becomes measurably more complex to project forward the economic implications of the powerful executive branch being overseen by candidates that are either less conventional or are being drawn from a pool of not just two but perhaps as many as three or four candidates.

Such uncertainty also has potential feed through with direct implications for monetary policy. For example, how exactly would the assertive Mr. Trump handle leadership appointments at the Federal Reserve? Would he keep current Chair Yellen in place? If she was "fired" as we have come to know him to do from his long running television reality show, exactly whom would he install in her place? And how quickly might he pull the hook on whomever he appoints depending on how the economy unfolds under his watch? These questions are not at all a knock against Mr. Trump, as his success in business and beyond is well demonstrated and certainly has not taken place by accident, but these answers are less uncertain given his strong personality and limited background in the political realm so far.

And what about the same questions in relation to Senator Sanders? Exactly what role does a self-described democratic socialist believe the Federal Reserve should be playing in directing monetary policy and what appointees come about as a result? Once again, not a criticism, but if nothing else, an uncertainty that the economy and financial markets will need to consider under such a scenario.

Bottom Line

Like all other Presidential elections that have come before, the 2016 contest will be interesting and exciting to watch. But depending on how it unfolds, it also has the potential to have wide reaching implications on both fiscal and monetary policy going forward. For unlike most past elections in recent years, today's line up of leading candidates are less conventional and come from a wider range across the political spectrum than they have in the past. If it turns out that we see a general election in the fall that is structured much differently than anything we have seen in the past, it will come with a great deal of intrigue and excitement but also a heavy dose of uncertainty for the U.S. economy and its financial markets. And if there is one thing we know to be true about financial markets in particular, it is that they do not like uncertainty. Stay tuned.

Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.