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Election Year Uncertainty: What Does It Mean for Markets?

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RANDY FREDERICK: Hello, and welcome to the Schwab Market Snapshot for June 7. I’m Randy Frederick.

Well, it seems like everyone is talking about politics these days, and it can be difficult to cut through all the chatter. So to help clarify the landscape a bit, joining me today from Washington, D.C., is Mike Townsend, Schwab’s vice president of legislative and regulatory affairs. Welcome back, Mike.

MIKE TOWNSEND: Great to be with you, Randy.

RANDY: So, Mike, let’s just jump right into it. I know that you’ve been following the presidential race very closely and you’ve been speaking about it all over the country. So can you give us an idea on where we stand? And what it is that we need to be watching between now and next month when the parties hold their conventions?

MIKE: Well, at this point, Randy, both Hillary Clinton and Donald Trump have accumulated enough delegates to become the presumptive nominees of their parties. But, of course, they won’t officially become the nominee until the delegates vote on the floors of the convention. So the Republicans will gather for their convention July 18 through the 21 in Cleveland, and Democrats will hold their convention the following week in Philadelphia. Between now and then I’ll be watching how both of these nominees—presumptive nominees—unify their party and try to get everyone together.

On the Democratic side, I think Hillary Clinton has a lot of work to do in order to make sure that Bernie Sanders’ supporters support her in the fall. Democrats are nervous about some of the polling they’ve seen. For instance, in the Indiana Primary back in May, 30% of Sanders’ voters said they would not vote for Hillary Clinton in the fall. So she has real work to do to make sure that she unifies the party there.

Similarly, on the Republican side, Donald Trump is doing a lot to try to unify his party. He received a big boost when Paul Ryan, the House Speaker, endorsed him at the beginning of June. But I think a lot of Republicans still have questions about whether he has the temperament to be President.

Finally, I’ll also be watching the vice-presidential choices, which both candidates should be making in the next month or so. I think it will be interesting to see who they choose and how they balance the traits and personalities of the nominees. Those candidates will be very, very closely scrutinized. So those decisions, I think, will be very significant.

RANDY: Yeah, and, of course, the presidential race is always getting the most attention, as it usually does. But you’ve been talking a lot about how important the race for the Senate is. So can you tell us how that fight is shaping up, and why that’s so important?

MIKE: Well, I think the battle for control of the Senate is really critically important, and that’s because it’s going to be by a very narrow margin. I would not be at all surprised to see it come out 51-49 or 52-48 for one party or the other.

But here’s the key: That narrow majority is going to act as a huge brake on the aspirations of whichever candidate wins the White House. In today’s modern Senate, you really need 60 votes—a super majority—in order to break a filibuster and really control the agenda. Republicans currently have a 54-46 majority, so Democrats would need to pick up four seats if they retain the White House—because the Vice President breaks a 50-50 tie—five seats if the Republicans go into the White House.

But in this current environment, the Republicans have 24 seats that are up for reelection while Democrats have just 10. So I think Democrats feel like they have a really good chance to take over the Senate.

Over in the House of Representatives, I do think that’s likely to remain in Republican control, but at this early date, even that is by no means certain.

RANDY: You know, I think those are some very important points, Mike. But I guess what everybody really wants to know, of course, is how does all this affect the markets?

MIKE: Well, answering that question is difficult, mostly because this election has been so unpredictable. In many ways, the campaign so far has kind of upended everything we know about how presidential elections are supposed to work.

So historical precedence and voting data from previous elections, past campaign strategy does and don’ts, all have been turned on their head, and make this a very-difficult-to-analyze election.

I also think this election is unusual because we haven’t had the typical policy debate that we usually have at this point in a presidential campaign. And many of the proposals that have been made seem to forgot that it’s Congress who writes laws—it’s Congress who appropriates federal dollars.

So the policy promises being made on the campaign trail seem highly unlikely, frankly, to succeed in the Senate.

As a result, I think that political uncertainty may contribute to some market uncertainty in the coming months, and that uncertainty is not unusual. Historically speaking, the eighth year of a presidency, the last year of a two-term president, has been a down one for the markets.

I think it’s important to realize, though, that we have a long way to go. It’s five months to election day. A lot can and will change. So speculating too much about how the markets will react is probably premature.

RANDY: It seems to me like the only real certainty is just more uncertainty. Thanks, Mike, for clarifying some of these points.

If you have more questions, please call and talk to a Schwab financial professional. And, you can read more about Mike’s Washington insights on Schwab.com. And, of course, you can always follow me on Twitter @RandyAFrederick. We will be back again. Until next time, invest wisely. Own your tomorrow.

Important Disclosures  

Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author’s opinions may change, without notice, in reaction to shifting economic, business, and other conditions. Supporting documentation for any claims or statistical information is available upon request.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Schwab Center for Financial Research (“SCFR”) is a division of Charles Schwab & Co., Inc.

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