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Election Is ‘Start of the Show, Not the End’: Commonwealth’s McMillan

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In a wide-ranging discussion during Commonwealth Financial Network’s annual conference on Nov. 4, the independent broker-dealer’s chief investment officer, Brad McMillan, addressed the major issues on every advisor’s minds, but added his own twist to the received wisdom on the Federal Reserve and the presidential election.

When asked in an interview whether the Fed will raise rates at its Dec. 15-16 FOMC meeting, McMillan answered that “it isn’t a question of raising rates, it’s a question of normalizing rates.” The Fed, he said, has “backed itself into a corner,” and now must “hustle to catch up” with an improving economy by instituting a 25 basis point increase in December. It’s arguable, he suggested, that the Fed has “waited too long” to raise rates, though he also suggested that having the Fed governors take their own policy-making Hippocratic oath—“first, do no harm”—would be appropriate.

The Fed’s nonaction, in which “we’ve seen the Fed shoot the recovery in its foot,” can be replaced now by a confidence-building raising based on wage growth, a labor shortage and an employment boom, all of which may well “kick off top-line growth” in the economy.

That scenario—the transition from a policy-driven to a fundamentals-driven economy—is one of the three major transitions McMillan sees playing out in the near future for U.S. markets and the economy.

He also sees the major issues in the presidential election campaign as being “symptomatic” in part of another major transition: from “global to local.” That transition is reflected in both major-party candidates speaking against any expansion of free-trade agreements, and in the anti-immigration policies of Donald Trump, which are similar to those of other politicians and popular movements around the developed world. While what will develop policy-wise in the next adminstration will not be “yesterday’s protectionism,” globalization, he concluded, will be “less of a contributor to growth going forward.”

That’s why McMillan believes that the Nov. 8 election will be the “start of the show, not the end” of these issues that have caused so much sturm und drang in the 2016 campaign, and that the splits seen in both major parties are symptomatic of “the 99%” being unhappy with their lot in life. While Trump’s utterances may be “outside” the policies expressed by both Democrats and Republicans over the past 50 years, they reflect strong feelings among the American public, so Trump is more of a “feature, not a bug.”

As for a President Hillary Clinton, McMillan said she will have “Bernie Sanders and Elizabeth Warren pushing her,” which is likely to result in “more dysfunction” in Washington. A Trump victory would likely result in a market correction, he said, but if either candidate wins, we can expect increased government spending, which would also likely increase consumer spending.

Over the next 12 months, we thus could see “much better growth” in GDP, helped along by the third major transition, of “capital to labor.”  

Over the past 30 years, McMillan says we’ve seen the financial sector grow and capital markets come to dominate the U.S. economy, while wages fell (partly due to an abundance of labor) and corporate profits rose. As seen in the most recent wage report, however, wages are increasing and there is a “relative scarcity of labor,” leading major employers like WalMart and others to raise employee wages.

As a result of the last 30 years, labor now “has a chip on its shoulder, and rightly so,” which both Bernie Sanders and Trump used to their advantage, McMillan said.