As Republicans gather in Cleveland to nominate Donald Trump for President, the presidential election is becoming increasingly worrying to investors, albeit for different reasons than those worrying Main Street.
Almost two-thirds of 650 institutional holders surveyed by investment bank Morgan Stanley said that the election results could materially change their view of U.S. stocks and the outlook for Treasury bonds.
The number predicting U.S. stocks would decline during the start of Trump administration was more than twice as large as that projecting a negative performance under the billionaire real estate mogul's presumed opponent, former Secretary of State Hillary Clinton. More than 350 institutional holders said the dollar would probably fall early in a Trump presidential term.
Morgan Stanley analysts, for once, politely disagree with the giant bank's pension and hedge-fund clients. They argued that political risks to the market are fairly minor -- both because Trump will probably lose, and because Congress would likely rein in his economic proposals even if he wins.
"Elections have consequences," a 16-member Morgan Stanley team led by Michael Zezas and Spencer Chang said. "But not all election consequences are transformational, and current evidence suggests the U.S. elections in November won't yield outcomes that substantially change market fundamentals in the near term."
The largest number of respondents thought stocks and the dollar would be little changed in the early days of a Clinton presidency, while almost 250 expected a rally in equities. Other banks including Credit Suisse and UBS have had similar surveys in recent days.
"You could imagine a Trump administration doing to our market what Brexit did to the U.K.,'' said Jared Bernstein, former chief economist to Vice President Joe Biden and senior fellow at the Council on Budget and Policy Priorities.
Trump's ascendance would have the most positive impact on energy shares like ExxonMobil (XOM - Get Report) and Royal Dutch Shell (RDS.A - Get Report) and financial shares like JPMorgan Chase (JPM - Get Report) and Bank of America (BAC - Get Report) , the survey said. More than half expected those shares to benefit from Trump, who has promised to repeal the Dodd-Frank financial reform law and shift energy policy to encourage oil drilling, more coal usage and offshore drilling.
Clinton is seen as more favorable for health care stocks like HCA (HCA - Get Report) and Athenahealth (ATHN) and information-technology shares like Microsoft (MSFT - Get Report) and Action Alerts PLUS holding Apple (AAPL - Get Report) .
Divided government is the key to keeping interest rates low, the survey respondents said. A plurality thought a Clinton presidency with Republicans controlling at least one house of Congress would be the most bullish result for Treasury bonds.
The Street's top concerns about the election are fiscal policy and financial services reform, as investors seek modification or repeal of Dodd-Frank and restructuring of Fannie Mae and Freddie Mac, the government-backed enterprises that buy or help securitize most U.S. mortgages. Trade policy, tax reform and infrastructure spending were seen as very important by a smaller number of investors.
Two issues that resonate with the GOP base ranked at the bottom of the Morgan clients' list of concerns: changing or repealing the Affordable Care Act and immigration reform.
The election is unlikely to make a huge difference to the market because control of Washington is likely to be divided, the 51-page report argues. New presidents since 1970 have only been able to get about 35% of their campaign promises enacted into law, and next year is unlikely to be different, the analysts said.
"Their most important insight is that the president, Democrat or Republican, doesn't get what they want," said Doug Holtz-Eakin, a GOP economist and head of the American Action Forum, who argues that corporate tax reform is the primary must-address issue for the next Congress. "It's a Washington parlor game to figure out what people want to do. But the key is to watch what they have to do."
That's because most new presidents only get a small handful of key initiatives enacted, Holtz-Eakin said. In Trump's case, the only policy he has repeatedly committed to is building a wall on the U.S.-Mexico border, though he has also proposed a giant tax cut and a boost in infrastructure spending. For Clinton, it's hard to know which of her many proposals she will make a priority, he said.
And Capitol Hill isn't the only -- or even the major -- Washington influence on the markets, he said.
"These [investors] have no clue who the next chairman of the Federal Reserve will be," Holtz-Eakin added.
In particular, Morgan was unimpressed by the one idea both major parties have proposed in some form -- boosting spending on infrastructure next year, exploiting low interest rates and the stabilized federal deficit to give the economy a boost.
Absent a recession, Congress and the next president are unlikely to approve a big enough package to move near-term growth higher, the team wrote. A likely package would not add any more than 0.2 percentage point to growth, they said. The economy has grown 2.4% in each of the last two years.
"[T]he politics of divided government and Republican House control ... suggest that a meaningful expansion of federal spending is not likely," Morgan Stanley's analysts said. "Furthermore, given the time it would take for a new Congress and administration to get settled, pass legislation, and break ground on new projects, the full effects of increased spending would likely not be felt until 2018."
Outside economists were more positive on the effects of infrastructure-spending proposals.
Clinton's plan to finance $1 trillion of investment over 10 years through direct federal spending and a government-backed infrastructure bank could boost gross domestic product by $80 billion a year, Moody's Analytics chief economist Mark Zandi said.
At 0.08% of GDP each year for 10 years, that impact is smaller than Morgan Stanley's number, but Zandi says that's fine. "I would say that is meaningful,'' he added.
Morgan's estimate is close to what the Congressional Budget Office has said a boost in infrastructure spending could produce, Bernstein said. It's worth doing while interest rates remain near zero, he argued.
"That makes a big difference in return on investment,'' he said.