US Elections

U.S. Elections: Policy and Market Implications

BY PAUL HOFFMEISTER

OCTOBER 5, 2016

MONEY MANAGEMENT INSTITUTE - 2016 EMERGING ASSET MANAGERS FORUM

o Election Outlook o Tax and Trade Outlook o Market Implications o Investment Frameworks o Biggest Policy Surprise?

2 Does it matter who becomes the next President? The post-WW2 statistics…

Real GDP ◦ Democratic Presidents: 4.35% ◦ Republican Presidents: 2.54%

Unemployment ◦ Democratic Presidents: Fell 0.8 percentage points ◦ Republican Presidents: Rose 1.1 percentage points

Inflation ◦ Fared similarly

S&P 500 Returns (annualized) ◦ Democratic Presidents 8.08% ◦ Republican Presidents 2.70%

Source: "Presidents and the U.S. Economy: An Econometric Exploration", Alan S. Blinder and Mark W. Watson, Woodrow Wilson School and Department of Economics, Princeton University, July 2014

3 Race for the White House

Will it be Hillary Clinton or Donald Trump? ◦ Clinton: ◦ Betting Markets ◦ PredictIt.org 68% probability ◦ Iowa Electronic Markets 67% (compared to 80% on August 17) ◦ Trump: ◦ USC/LA Times Poll: Trump 46.3%, Clinton 42.4% ◦ Brexit vote phenomenon ◦ Remain traded 85% likelihood on election day ◦ Trump has consistently defied betting markets (e.g. early and late GOP primaries) ◦ Swing states: Ohio +5, Florida +3, Nevada +2 (as of September 14) ◦ Nate Silver (FiveThirtyEight.com): ◦ Probability: Clinton 55.8%, Trump 44.2% ◦ Electoral Votes: Clinton 278.3 electoral votes, Trump 259.4

4 What Party will control the Senate? Democrats need 4 if Clinton wins, 5 if Trump wins.

11 Competitive Races:

◦ Florida, Iowa, Illinois, Indiana, Missouri, New Hampshire, Nevada, North Carolina, Ohio, Pennsylvania and Wisconsin

Leaning Democrat: Illinois, Indiana, Wisconsin Leaning Republican: Florida, Iowa, Missouri, North Carolina, Ohio

Senate Control Boils Down to: New Hampshire, Nevada, Pennsylvania

5 What Party will control the House? Dems/GOP Need 218 of 435 Seats for Control

2015-2017 Congress: 247 Republican – 188 Democratic

PredictIt.org: 75% chance of 218+ Republican Seats

University of Virginia Center for Politics: ◦ Republicans 234 – Democrats 201 Cook Political Report: ◦ 202 Republican seats are solid, 23 leaning or likely for Republicans

6 2017: Year of Fiscal Stimulus Every new presidency in modern era has instituted fiscal reforms Nixon: Tax Reform Act of 1969 Ford: Tax Reduction Act of 1975 Carter: Revenue Act of 1978 Reagan: Economic Recovery Tax Act of 1981 Bush ‘41’: Omnibus Budget Reconciliation Act of 1990 Clinton: Omnibus Budget Reconciliation Act of 1993 Bush ‘43’: Economic Growth and Tax Relief Reconciliation Act of 2001 Obama: American Recovery and Reinvestment Act of 2009 Clinton/Trump: ?

7 Most important policymakers of 2017 Clinton Trump Chuck Schumer Larry Summers Paul Ryan Kevin Brady

8 The Major Tax Proposals

Current Top Tax Rate Clinton Trump Brady

Income Tax 39.60% 4% surcharge on AGI > $5m 33% 33% 30% minimum tax on AGI > $1m ('Buffett Rule')

AMT - Maintain Eliminate Eliminate

Capital Gains 23.80% 23.8% to 43.4% 20% 16.50% Ord. Inc. Tax Rate if held < 2 years 23.8% if held > 6 years

Corporate Tax 35% No Change 15% 20% Broaden Definition of Inversion, (25% for pass-throughs) Prevent Earnings Stripping & new Exit Tax

Estate Tax 40% 45% 0% 0% $5.45m Exclusion $3.5m Exclusion

Repatriation 35% (corp tax rate) Exit Tax on unrepatriated earnings 10% temporary rate 8.75% temporary rate & new Exit Tax Then end deferral on taxes owed

9 PH4

Fiscal Reform: Impact to GDP?

The Woodhill Equation: GDP = 0.08 (residential assets) + 0.44 (non-residential assets)

Strong fiscal reform will add 2% to annual GDP.

10 Slide 10

PH4 http://goldgoliath.com/louis-woodhill-why-higher-inflation-is-a-very-very-bad-idea-forbes/ Paul Hoffmeister, 9/10/2016 U.S. Economy Desperate for ‘Escape Velocity’ 12.50%

10.00%

7.50% GDP lacks escape velocity

5.00%

2.50%

0.00% 1990 1993 1996 1999 2002 2005 2008 2011 2014 -2.50%

-5.00%

-7.50%

-10.00% U.S. Real GDP Growth (Quarter over Quarter) Effective Federal Funds Rate

11 Fiscal Reform: Simple Corporate Tax Reform Yields Major Impact

Corporate Tax Reform Resultant After-tax Return on Corporate Profits to Shareholders

35% Current statutory rate - 28% President Obama's offer, 2012 tax negotiations 10.8% 20% Chairman Brady's current proposal 23.1% 15% Donald Trump's current proposal 30.8%

Strong Fiscal Reform No Fiscal Reform (including Improvements to tax incentives) (no improvements to tax incentives)

Overweight: Overweight: Equities Fixed Income Dollar Forex High Quality Corporate Bonds Industrial Commodities (oil, natural gas, wheat) Precious Metals (gold)

Underweight: Underweight: Fixed Income Equities Precious Metals (gold)

12 Clinton/Trump: Implications for Sectors

Hillary Clinton Presidency Donald Trump Presidency

Overweight: Overweight: Hospitals Energy Infrastructure Financials Managed Care Infrastructure Solar/Renewable Energy Pharmaceuticals Restaurants

Underweight: Underweight: Energy Hospitality Pharmaceuticals Railroads

13 Trade: Policy & Investment Implications Trade Renegotiations: Investment Considerations

Cautious: Peso-$ forex rate (bearish peso) • Sunset of Current Post-WWII Trade Yuan-$ forex rate (bearish yuan) Policy • Bi-partisan pressure from Industries Vulnerable to Significant Transformation: electorate Audio-Video Equipment • Breakdown in free-trade orthodoxy Computers Furniture Semiconductors • New era in U.S. Trade Policy Textiles and Apparel • ‘Trade Harmonization’; Aerospace ‘Better Trade Deals’ Biotechnology • Closer adherence to trade Life Sciences agreements Nuclear Technology • Surcharges and sanctions • Forex threats, penalties, and interventions

14 Monetary Reform? Monetary Reform: What Alternative? Rules-based System Anchored in Interest Rates Taylor Rule • Likely… if Trump wins • Aspiration of Advisers Rules-based System Anchored in Price Target • Interest in Congress • Inevitable Topic in Trade NGDP-targeting Renegotiations Gold Price Target • Objectives and Nuance Will Commodity-basket Target Mean Everything What target? At what level? • Alternatives? Historical relationship of price universe with the target level? • Taylor Rule, NGDP-targeting, or Policymaker Adherence to Communication Best Practices? Gold or Commodity- Clear Objectives targeting Public Understanding • Market Adjustment and Communication: Integrated, Articulated, Proactive Volatility?

15 Conclusion Average GDP Growth Rate by Term Rank Term Growth Rate (%) • Makeup of next government 1 Truman (1949-1953) 6.57% is a tossup 2 Kennedy-Johnson (1961-1965) 5.74% • Contours of policy evolution 3 Johnson (1965-1969) 4.95% exist 4 Clinton (1997-2001) 4.03% 5 Reagan (1985-1989) 3.89% • Probability of fiscal reform 6 Nixon (1969-1973) 3.57% >70% 7 Carter (1977-1981) 3.56% • Major market adjustments in 8 Clinton (1993-1997) 3.53% 2017 9 Reagan (1981-1985) 3.12% • Frameworks for what and 10 G.W. Bush (2001-2005) 2.78% how

• Diversify within investment Source: Presidents and the U.S. Economy: An Econometric Exploration, ‘themes’ Alan S. Blinder and Mark W. Watson, Woodrow Wilson School and • At brink of bull market? Very Department of Economics, Princeton University, July 2014. possible.

16 Paul Hoffmeister, Portfolio Manager

Paul is a Portfolio Manager and Partner at Quaker Funds. He also serves as Economic Counsel to Bretton Woods Research, a financial research firm that assesses macroeconomic variables to identify economic catalysts, investment opportunities, and risks. Paul was previously the Director of Market Strategy and Chief Economist at Polyconomics and has advised several political campaigns. He has written for Forbes.com and has been quoted by such news outlets as Bloomberg, Reuters, and National Review. In addition, Paul has appeared on Kudlow & Company and radio talk shows. He graduated Georgetown University with a concentration in accounting and finance.

He can be reached at [email protected]

17 Mutual fund investing involves risk, including the possible loss of capital.

Consider a fund’s investment objectives, risks, charges, and expenses carefully before investing. The Statutory and, where available, the Summary Prospectuses contain this and other important information and are available for download at www.quakerfunds.com or by calling 800.220.8888. Read carefully before investing.