Libby Cantrill, CFA October 2016 Trump, Populism and the Economy This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. 2016, PIMCO. For investment professional use only CMR2016-0915-211740
What do all of these have in common? The DMV Colonoscopies Cockroaches 58% vs. 24% Congress 58% vs. 31% Congress 44% vs. 42% Congress Genghis Khan Head Lice 41% vs. 37% Congress 67% vs. 19% Congress As of 30 June 2016 SOURCE: PhotosForWork.com CMR2016-0915-211740 1
The House of Representatives: Likely to stay Republican, although a Democratic takeover is possible All 435 House seats are up for re-election in 2016 Republicans currently control the House: 247 vs. 188, the biggest Republican majority since 1928 Democrats are expected to win back 10-20 seats, well short of the 30 they need to take back the majority but will depend on down-ballot effect Redistricting has led to fewer swing districts, making only ~30 seats truly competitive More Republican seats are vulnerable, which could be negative should there be a Democratic wave FEW COMPETITIVE SEATS IN HOUSE: But Republicans are more vulnerable Number of Republicans Number of Democrats In Congress 247 188 In districts Obama carried 26 183 In districts Romney carried 221 5 As of 31 December 2015 SOURCE: Congressional Quarterly 2
The Senate: Democrats will pick-up seats, but the Senate will likely go the way of the White House 34 seats are up for reelection, 24 of which are Republican and 10 are Democrat Of the 24 seats that Republicans are defending, eight (in red) are vulnerable, whereas only two seats held by Democrats (in blue) are vulnerable Vulnerable Senate seats are in those battleground states that are likely to determine the presidency; how goes the White House, so goes the Senate? Seats held by Democrats, competitive for Republicans Seats held by Republicans, competitive for Democrats NV CO WI IL IN OH PA NH Current Senate: Democrat: 46 Republican: 54 Democrat pick-ups needed: 4 or 5 NC As of 30 June 2016 SOURCE: Congressional Quarterly FL 3
Is this the next U.S. President? SOURCE: Google Images 4
Maybe, but a Trump candidacy flies in the face of the GOP s own conclusions after a larger-than-expected loss in 2012 Donald Trump has single-handedly ripped up the GOP autopsy report after the 2012 general election loss, which may make it difficult to attract key voters in November Key Findings from the RNC s 2012 Election Autopsy Report Regarding a Potential 2016 Candidate: 1. Be inclusive of women, minorities and gays 2. Support immigration reform 3. Stop being the rich guys 4. Look to state governors for future of the party SOURCE: Republican National Committee, PIMCO 5
2016 voters will be the most diverse yet The 2016 electorate will be one of the most diverse: Non-college educated whites (Trump s base) have decreased from 65% of the electorate in 1980 to an estimated 34% in 2016 Since 1980, no candidate has won the White House without winning at least 30% of the Hispanic vote 120 2016 voters most diverse ever % among eligible voters Asian Hispanic African American White 120% Demographic breakdown of each party over time 90 2 3 3 4 4 7 8 9 11 12 12 12 12 12 12 90% 23% 44% 4% 11% 60 30 78 75 73 71 69 (%) 60% 30% 77% 56% 96% 89% 0 0% 1980 2012 1980 2012 Democratic White Non-white Republican White Non-white Source: PEW Research Center; Washington Post, National exit polls 1982-2012; Bureau of the Census Voting and Registration ; U.S. Census Population Estimates (2012); Adults are age 20 and over, youth are under age 20. Hispanics include Hispanics of any race; Other category includes native peoples and those of two or more races 6
Trump has historically high unfavorable ratings especially among women, Hispanics and African American voters 80% Average favorability ratings for Trump 0% Average unfavorability ratings for Trump accross different demographic groups 40% 34% -20% 0% -40% -40% -80% Favorable -64% Unfavorable -60% -80% -100% -57% -71% -70% -57% -79% SOURCE: Washington Post/ABC News poll, 2 October 2016 7
Or, is this the next U.S. President? SOURCE: Google Images 8
Clinton has her own challenges: High negatives, lack of trustworthiness, and the specter of the FBI investigation 80% Average favorability ratings for Clinton 0% Average unfavorability ratings for Clinton across different demographic groups 40% 0% -40% -80% 45% Favorable -53% Unfavorable -20% -40% -60% -80% -100% -27% -44% -56% -53% -62% Men Women Millenials 65+ Years Non-Whites SOURCE: Washington Post/ABC News poll, 2 October 2016 9
Or, is this the next U.S. President? SOURCE: Google Images 10
Undecided and third party candidates disproportionately matter this election Third party candidates have had limited success in U.S. presidential elections; they are better at siphoning-off votes than getting elected (Abraham Lincoln was the last to win the White House) With two unpopular candidates, ~15% of the electorate is either supporting a third-party candidate or is undecided; watch these voters as they could impact the election (e.g., Brexit) Usually third-party support declines as we get closer to the election (which is happening) SOURCE: Real Clear Politics polling average as of 2 October 2016 11
White House 2016: The electoral map is key and slightly favors a Democrat (with or without Trump) as the nominee CA 55 OR 7 WA 12 ID 4 AZ 11 MT 3 WY 3 NV 6 UT 6 CO 9 NM 5 ND 3 MN 10 SD 3 NE 5 KS 6 OK 7 IA 6 MO 10 AR 6 WI 10 IL 20 MS 6 MI 16 IN 11 TN 11 AL 9 KY 8 OH 18 GA 16 WV 5 SC 9 PA 20 VA 13 NC 15 NY 29 VT 4 3 NH ME 4 NJ 14 DE 3 MD 10 DC 3 MA 11 RI 4 CT 7 AK 3 TX 38 LA 8 FL 29 Democrat 217 Republican 191 Swing 130 Assumed safe electoral votes* 270 HI 4 As of 31 July 2016 SOURCE: Real Clear Politics, Gallup, Guggenheim Research * Based on historical election results and current polling 12
Trump s pathway to 270 electoral votes: Feasible but more narrow. Turnout and undecided voters will make the difference In order to secure the needed 270 electoral votes to win the presidency, Trump has to win Florida, Ohio and keep North Carolina Republican; Clinton can afford to lose these states except Pennsylvania (assuming she keeps Colorado and Virginia) Watch for how undecided voters start breaking as well as for each campaign s ground game (e.g., strength in early voting) Pennsylvania Ohio North Carolina Florida Unemployment rate: Unemployment rate: Unemployment rate: Unemployment rate: 5.6% (.5% yoy) 5.0% (.2% yoy) 4.9% (.9% yoy) 4.7% (.6% yoy) Voting history: Voting history: Mixed* Voting history: Republican Voting history: Mixed* Democrat since 1992 Polling: Clinton (+0.5%) except 2008 Polling: Clinton (+2.8%) Polling: Clinton (+8.6%) Polling: Clinton (+2.6%) As of 2 October 2016 SOURCE: Real Clear Politics 13
But other things may matter: Pre-election returns have correctly predicted 19 of the past 22 presidential elections As of 30 June 2016 SOURCE: Bloomberg Year S&P 500 price return Incumbent party '28 14.91% Won '32-2.56% Lost '36 7.92% Won '40 8.56% Won '44 2.29% Won '48 5.36% Won '52-3.26% Lost '56-2.58% Won X '60-0.74% Lost '64 2.63% Won '68 6.45% Lost X '72 6.91% Won '76-0.09% Lost '80 6.73% Lost X '84 4.80% Won '88 1.91% Won '92-1.22% Lost '96 8.17% Won '00-3.21% Lost '04 2.16% Won '08-19.48% Lost '12 2.45% Won 14
Changes in unemployment (vs. the absolute unemployment figure) have also been relatively predictive of election outcomes Except for in the 2000 election cycle, a decrease in the unemployment rate (U3) in the year before the election has led to the incumbent party staying in power 10.0% U3-1 Year Before U3 - Right Before Election 9.0% 8.5% 8.8% 8.0% 7.0% 6.0% 6.0% 7.5% 7.4% 5.8% 5.4% 7.0% 7.6% 5.5% 5.2% 6.0% 5.4% 6.1% 7.8% 5.0% 4.7% 4.0% 4.1% 3.9% 3.0% 2.0% 1.0% 0.0% 1980 1984 1988 1992 1996 2000 2004 2008 2012 Reagan Reagan Bush Clinton Clinton G.W. Bush G.W. Bush Obama Obama 15
Presidential favorability ratings have also been a bellwether for election outcomes For the past 50+ years, if the sitting president has had an approval rating of 50 or above, the party in power has remained in power (exception was in 2000) (%) 70 60 50 40 30 20 Average approval ratings of sitting president in fall of election years 60 60 57 47 43 33 31 25 50 Change in party No change in party Unknown 54 10 0 Johnson Nixon Ford Carter Reagan Bush I Clinton Bush II Obama 1988 2000 2008 2012 Obama 2016* * As of July 2016 SOURCE: Gallup 16
Average polling 30 days post-convention has correctly predicted the popular vote since 1952 Year Average polling: 30 days post-convention Actual electoral result Correctly predicted popular vote 1972 Nixon +29.7 Nixon +23.2 1976 Carter +4.0 Carter +2.0 1980 Reagan +2.6 Reagan +9.7 1984 Reagan +16.8 Reagan +18.2 1988 Bush +3.0 Bush +7.7 1992 Clinton +11.7 Clinton +5.6 1996 Clinton +16.0 Clinton +8.5 2000 Gore +2.0 Gore +0.5 2004 Bush +1.8 Bush +2.5 2008 Obama +3.1 Obama +7.3 2012 Obama +1.9 Obama +3.9 SOURCE: Real Clear Politics, FiveThirtyEight 17
Putting it all together: Demographics, Obama s improving approvals, and a decent economy favor a Democrat in the White House SCENARIO PRESIDENCY HOUSE SENATE Democrat victory; Split Congress Democrat wins Republican majority Narrow Democrat majority Democrat wave Democrat wins Democratic majority Democratic majority Republican wave Republican wins Republican majority Narrow Republican majority Democrat victory; Republican Congress Republican victory; Split Congress Democrat wins Republican majority Narrow Republican majority Republican wins Republican majority Narrow Democratic majority MORE LIKELY LESS LIKELY LIKELIHOOD SOURCE: PIMCO 18
Which sectors will benefit under a Republican or Democrat White House? SECTORS REPUBLICAN (TRUMP) DEMOCRAT (CLINTON) Tax reform Corporate + + Tax reform Individual + Neutral Infrastructure + ++ Immigration - + Trade - Neutral Defense ++ + Traditional energy + - Alternative energy - + Housing Unknown Neutral Pharma Unknown - Community banks Unknown + Big banks Unknown - For-profit education Unknown - SOURCE: PIMCO 19
Markets do well following the election regardless of the outcome, but that may be different under a Trump presidency 40.0% 3month return of S&P 500 post-election 1 year return of Barclay's Aggregate post-election 33.4% 1 year return of S&P 500 post-election 30.0% 20.0% 10.0% 0.0% -10.0% 4.3% -0.4% -3.3% 23.4% 19.5% 14.3% 12.5% 11.3% 9.0% 9.5% 10.1% 7.0% 8.4% 5.8% 24.9% 15.3% 12.8% 7.5% 8.3% 5.5% 6.7% 1.1% -1.5% -6.4% -20.0% -30.0% -22.1% -13.9% 1980 1984 1988 1992 1996 2000 2004 2008 2012 Reagan Reagan Bush Clinton Clinton G.W. Bush G.W. Bush Obama Obama As of 30 June 2016 SOURCE: Bloomberg 20
Despite conventional wisdom, markets do well under a Democrat White House but flourish under Republican Congresses 16% 14% S&P 500 returns (since 1932) 13.96% 13.90% 14.02% 13.11% 12% 10% 8% 6% 4% 9.30% 4.55% 5.88% 5.71% 7.79% 5.79% 8.68% 2% 0% As of 31 July 2016 SOURCE: Bloomberg Note: Returns are annualized 21
Does the party in power or the election cycle have any impact on Fed action? No evidence of that 20 Fed Funds Rate No change in party Change in party 18 16 14 12 10 8 6 4 2 0 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 As of 31 December 2015 SOURCE: Federal Reserve, Bloomberg 22