Should investors be fearful of Elizabeth Warren?

Some of the most prominent names on Wall Street are queuing up to criticise Democrat presidential frontrunner Elizabeth Warren, saying stocks will suffer heavy falls if the left-leaning candidate's election prospects continue to brighten. Should investors be worried? Billionaire hedge fund manager Paul Tudor Jones certainly thinks so, recently warning that the S&P 500 would sink 25 per cent if Warren wins the 2020 election. Veteran money manager Mark Mobius agrees, saying a 20 or 25 per cent market fall is "probably possible" if Warren defeats Donald Trump next year. Billionaire investor Ron Baron, a lifelong Democrat, isn't a fan, describing Warren's proposed wealth tax as "pretty nuts".

The strongest words, however, have come from billionaire hedge fund manager Leon Cooperman. "This is the f**king American dream she is s***ting on", complained Cooperman, who has warned that the US market would drop 25 per cent if Warren is elected president and who recently outlined his many reservations in a five-page letter to the Massachusetts senator.

Preparing for Warren

Wall Street is increasingly preparing for the prospect of a Warren presidency. A recent Evercore ISI survey of investors found 70 per cent believe she will win the Democrat party’s nomination for president. Bookmakers agree, making Warren the favourite to win the nomination.

Right now, the Democrats are also odds-on with the bookies to win next November’s presidential election. With the Iowa caucuses less than three months away, Warren’s progress has the potential to move markets sooner rather than later. Indeed, some say echoes are already being felt, with Oppenheimer last month describing the underperformance in bank stocks as the “Warren correction”.

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Markets will start to price in a Warren presidency long before next year's election, reckons high-profile hedge fund manager Steve Cohen, who predicts stocks will suffer falls of 10 to 15 per cent if she becomes the Democrat nominee. Antipathy from the tiny billionaire class is hardly unexpected, of course, given that Warren has proposed a wealth tax of 3 to 6 per cent on households with a net worth of over $1 billion. That said, Warren hasn't sought to downplay suggestions that the broader financial class ought to fear her presidency. In September, CNBC TV personality Jim Cramer said he was hearing the phrase "she's got to be stopped" from fearful bank executives, which prompted Warrren to retweet the CNBC story, adding: "I'm Elizabeth Warren and I approve this message." Her policies offer Democrat primary voters "a menu as ambitious as anything seen since FDR's New Deal", the Economist observed recently, describing them as a "fundamental reworking of American capitalism".

The financial sector has long been targeted by Warren, who has proposed tougher regulation and breaking up America's biggest banks; a financial transaction tax; changing the taxation treatment of investment gains for the top 1 per cent of households; and stopping "legalised looting" in the private equity sector and putting them "on the hook for the debts of companies they buy". Big tech, too, is nervous. Warren has promised "big, structural changes" to promote more competition, including breaking up Amazon, Facebook, and Google.

Facebook founder Mark Zuckerbeg has described her antitrust proposal as an "existential" threat and said it would "suck for us". Analysts warn that healthcare companies are under threat from her $20 trillion Medicare-for-all plan, while it's also clear that she's "not going to be friendly to the energy industry", notes Jefferies strategist David Zervos.

Negative for markets?

There is, says Zervos, "a general perception that it would be a significant equity market correction if she were to win". That's borne out by an RBC Capital Markets survey showing that 89 per cent believe electing a Democrat other than the centrist Joe Biden would be bearish or very bearish for US stocks.

It's "very reasonable" to assume that the enactment of Warren's policies would be "negative for the stock market in the extreme", according to Sevens Report Research. While her policies would "likely improve quality of life for many demographics", they would do so at the expense of corporate profits and hurt earnings "universally". Other strategists focus more on individual sectors, Bank of America cautioning that healthcare, technology, financials and energy are "most exposed to expected regulatory pressure under her presidency". However, some strategists see the concern as overblown. RBC says markets may be more volatile next year due to Warren-related angst, but any pain is likely to be "temporary". That's echoed by David Zervos, who sees her agendas as similar to Barack Obama's in 2007. Stocks went on to enjoy excellent returns during the Obama presidency and, while Zervos cautions that some sectors may be affected by Warren's policies, he says her presidency is unlikely to be a significant negative for the overall market.

Some strategists expect Warren to pivot to the centre in the event that she becomes the nominee, whilst others say that, in any event, she faces a battle in enacting her more radical proposals, particularly if the Republicans retain control of the US Senate.

Trump forecasts

Of course, forecasting such matters is an inherently tricky business. Stocks have rallied under Donald Trump and many investors are now keen on his re-election, but Trump was widely seen as a major negative for markets prior to his 2016 election victory.

Barclays, RBC Capital Markets and Bridgewater, the world's biggest hedge fund, all warned of double-digit percentage losses in the event of a Trump victory, while billionaire hedge fund manager Paul Singer said Trump's trade policies would be "close to a guarantee" of a global depression.

Initially, markets appeared equally wary of Trump. One study, “What do financial markets think of the 2016 election?”, examined market movements in the run-up to the election and concluded stocks were likely to fall 10 to 15 per cent if Trump defeated Hillary Clinton. Markets abruptly changed their mind on Trump within hours of his victory and the narrative suddenly shifted, with commentators prognosticating as to which stocks and sectors were most likely to benefit under the new administration.

However, the forecasters were wrong-footed again; in both 2017 and 2018, an index of companies attacked by Trump “blew away” those he favoured, noted money manager and Bloomberg columnist Barry Ritholtz. As a general rule, strategists tend to see Republican policies as more market-friendly but stocks have actually fared much better under Democrat administrations over the last century. That said, correlation is not causation, and much research suggests a president’s long-term impact upon stock returns tends to be minimal.

This also appears to be the case outside the US, with one major study of 24 stock markets under 173 different governments concluding that “investment strategies based on the political orientation of countries’ leadership are likely to be futile”. Markets don’t like uncertainty so stocks may well be about to become more volatile, but forecasting market responses to political developments isn’t easy. That point was made by Vanguard the day after Trump’s election victory in November 2016, when it advised investors to “not subject themselves to the political whims of the moment” – good advice that may be worth remembering as election fever mounts in 2020.