There Will Be Gridlock, No Matter What

An internal JP Morgan Chase analysis released a few days ago reports that regardless of who wins in November, “a divided government seems the most likely outcome.” The document, titled Off to the Races: The 2016 US Election and the Markets, reveals a glimpse of what analysts at one of the largest financial firms in the world are thinking about the quadrennial franchise. It turns out, all the scaremongering aside, that the prospect of President Trump is quite unlikely — at least for now.

The JPM analysts begin by commenting that “the races” are on, not just the one for the Chief Executive, but also who will control the Congress. “As it stands today,” they write, “a clean sweep by either party seems unlikely.” They continue:

And even if one party or the other manages to manufacture a sweep of the White House and Congress, the parties are hardly cohesive political units. Deep fault lines in both parties became evident during the primaries, and to varying degrees remained quite visible through the conventions. While the Democrats made a show of coming together, the Republicans remain visibly divided. One way or another, a divided government seems the most likely outcome for this election.

They project a victory for Hillary Clinton, a Democratic Senate, and a Republican House of Representatives. It is also possible “the election may impact the economy before it even happens.” Since the 2016 “election season is shaping up to be pretty contentious,” with “some policies that have been offered by the field … outside the norm for post-WWII America,” economic activity may be dampened by the “policy uncertainty” around.

The analysts concur that the “unpopularity contest” between Clinton and Donald Trump “seems an apt description.” While the “Democrats will likely benefit from higher voter turnout,” since it is a presidential election year, “considering the current geographic configuration of congressional districts”—a polite reference to gerrymandering—“the Republicans will still have significant advantages” in the House. However, the Senate is “very much in play.”

As for what really matters, what they call the “electionomics,” the analysts point out “the sharp distinction between what presidents say they would like to do and what is likely to happen,” which is easier to do for Clinton because her “campaign website features dozens of plans to address different issues, each of which contain[ing] a bulleted list of more specific policy proposals.” While “it is less clear which of these she would prioritize while in office,” Trump “has released fewer detailed proposals for specific policies,” which requires “more speculation about his intentions.”

That said, “one area where Trump has released a detailed, written policy proposal,” the JP Morgan analysts observe, is taxes. “He proposed comprehensive tax reform that would reduce the top personal income tax rate from its current 39.6% to 25%, reduce corporate and other business income tax rates to 15%, and eliminate the estate tax.” It is “estimated that his plan would reduce revenues by about $9.25 trillion over the next ten years” and “add an additional $11.5tn in debt … debt-to-GDP ratios would increase sharply to 127% by the end” of 2026: “it appears that Trump’s plan would result in larger deficits and significantly higher Treasury issuance.”

Megabanks like JPMorgan Chase have been vilified, rightfully so in many cases, so it is instructive to see their own analysis of what is happening. “Since the financial crisis, election seasons have created volatility in large cap bank stocks,” i.e. the Too-Big-To-Fail financial institutions. “We expect that this election season will be no different for our sector.” There will be “volatility,” “uncertainty,” and, maybe most telling of all, “headline risk.”

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