Greg Valliere got it right when, just after Donald Trump sketched out his economic plan in a 2016 campaign speech, the pundit tagged him “the pro-growth candidate” for president. Now Valliere worries that the economy is “too strong,” “overheating” and “a real risk,” he tells ThinkAdvisor in an interview.
The “red-hot” economy and accompanying rising interest rates are chiefly what triggered the market plunge last week, says the nonpartisan guru. He predicts that President Trump and Federal Reserve Chairman Jerome Powell will exchange blows over rates next year.
In the interview, he opines too on whether the midterm elections will result in the House and/or Senate’s flipping to the Democrats and how such potential changes would impact the stock market.
The well-connected, Washington, D.C.-based chief global strategist of Horizon Investments specializes in analyzing the nexus of politics and economics. Both insiders and cognoscenti wannabes devour his insightful blog, “Capitol Notes.” Earlier, Valliere, 69, directed research for Charles Schwab Research Group.
While Trump may provoke many Americans to the boiling point, Valliere, in the interview, forecasts that he will be the favorite in 2020. What’s more, he argues, “Elizabeth Warren is definitely running” for president.
For most of his 30-plus-year career, Valliere has advised large institutions, and he’s a popular speaker at industry events, including Schwab’s Impact conference and the Investments & Wealth Institute’s (formerly IMCA) annual conference.
ThinkAdvisor interviewed Valliere by phone on Oct. 10, 90 minutes before the market plummeted more than 800 points that day. Among other issues, the frequent commentator on CNN, Fox Business News and CNBC talked about the Trump tax cuts as a midterm election issue, the Russia Investigation and a much-discussed — and much- dissed and -dismissed — potential presidential impeachment. He also offered advice to FAs on managing clients made jittery by the rate hikes.
Here are highlights from our conversation:
THINKADVISOR: President Trump is holding rallies for the midterm elections’ Republican candidates. That’s on top of the many rallies he’s held ever since he took office. What do you make of his strategy?
GREG VALLIERE: One of the premises I work from is that Trump is already laying the groundwork for his re-election bid. I think he’s the favorite to win in 2020 — certainly nobody could even remotely take him out for the nomination. So he’s going to talk real tough to the people of Ohio, Michigan and Pennsylvania on issues like trade.
Seems he had a great “marketing” campaign that got him elected in 2016. He played to people that Hillary Clinton called “a basket of deplorables.”
Absolutely. Trump is brilliant at that. He very adeptly plays wedge issues — like now, it’s stop-and-frisk in Chicago — and it makes a difference. He’s hardly a unifier. He’s a polarizer, no question about that.
What do the Democrats need to flip the Republican House of Representatives in the midterms?
It’s pretty likely that the House goes back to the Democrats; and the reason is that the key voters in the upcoming elections are women, people of color and young people, all of whom are motivated more than usual to vote. The Democrats have the most motivated base of voters.
What’s their platform?
It’s not good enough for them to run on a platform of “Trump Stinks.” Hillary proved that. You have to have a more substantive agenda. The Democrats are hitting hard on health care, specifically pre-existing conditions, which are [protected by Obamacare]. The Republicans want to abolish Obamacare, but they don’t have a clear replacement [addressing pre-existing conditions]. Also, the Democrats have the upper hand on environmental issues.
But then there’s the economy. That’s obviously a major plus for the Republicans.
The economy is the issue that usually makes all the difference in the world. With an economy this strong, that’s another advantage for Trump. I think Trump would like to make the midterms a referendum on him. A lot of Democrats in purple and blue states would be delighted to make this a referendum about him.
How will the midterms affect the stock market?
I’m not persuaded that they’ll have a big impact on the market. Even if the Democrats were to take both houses — which is not out of the question — there’s no chance that an activist Congress could undo the Trump agenda. There’s no way they could kill the Trump tax cuts because he would veto that — and his veto power is good.
The Democrats talk about impeaching Trump if they win the House. What are the odds of his being removed from office?
There’s a chance that, if the House is controlled by the Democrats, they would impeach him; but conviction by the Senate [two-thirds vote needed] is very unlikely. So I think the Senate — which I believe will stay Republican, though that’s a closer call [to make] — would acquit him.
What’s one big reason the Senate won’t flip?
In red states, a lot of conservative voters who were kind of indifferent about the midterms have been motivated because they feel [Supreme Court Associate Justice Brett] Kavanaugh was unfairly treated [in the confirmation process].
But do you think the Kavanaugh issue will simply die down?
Probably. The female turnout for the midterms will be strong. But Trump is such a master at spinning that he’s managed to spin [that controversy] as a persecution of Brett Kavanaugh. Excuse me! So I think the Republicans will probably get some modest advantage in the red states.
What’s causing the big market slide?
The cynical response is: It’s October. I think the problem is, ironically, that the economy is too strong. We’ve got a red-hot economy right now. It looks like the third quarter will come in at around 4% [GDP growth rate] and the fourth quarter, above 3%. More than anything, equities worry that the era of exceptionally low interest rates is coming to an end. We saw a kind of spike in rates [the previous week], which was a little unnerving. And [Federal Reserve chair Jerome Powell] saying that we’re nowhere close to “neutral” on interest rates certainly implies that the Fed has a lot more work to do [i.e., raise rates].
Please elaborate on your view that the economy is overheating.
I’ve been saying that for a while. An overheating economy is a real risk. As long as the economy looks like it’s overheating, it means that Powell will [institute] more rate hikes. He’s almost certain to raise rates in December and at least two more times next year.
Trump has been quite critical of Powell’s hiking rates. Your thoughts?
Later this year and going into 2019, you’ll see friction increase between the White House and the Fed. That’s pretty impressive: the president in a fight with his Fed chairman!
Who at the White House is issuing the most significant economic policy nowadays?
That’s a really good question. No one jumps out as the undisputed economic policymaker. [Treasury Secretary] Steve Mnuchin keeps his head down and is a survivor. [National Economic Council Director Larry] Kudlow has an impact; the president and he get along well. [Director of Trade & Manufacturing Policy] Peter Navarro and [Office of Management & Budget Director] Mick Mulvaney play a role. But no one stands out as the dominant economic player.
The Trump tax cuts must be something the Republicans are bragging about ahead of the midterms.
They’ve actually been a liability for the Republicans, not an asset as they thought six months ago. The overwhelming public perception is that the cuts mainly benefited the very wealthy and corporations. In many states, Republicans have even stopped mentioning their support for the cuts. They feel it’s an albatross.
But the tax cuts for corporations surely have been helpful for investors.
The corporate tax-cut story is the key to understanding why stocks have done so well this year and corporate profits are way up.
What sectors of the market do you like?
I still like defense. I like the banks. A lot of financial services firms do well when we get increases in the federal funds rate because they earn more interest income.
What about technology?
My sense is that tech faces more regulatory challenges — more headline risk. For example, Trump might bash Amazon; and it may be a bad news day for tech. But I don’t see that having a significant impact on their earnings.
Do any sectors very much concern you?
It’s been a bad year for emerging markets. There’s a growing risk of problems there. With U.S. interest rates going higher and the dollar getting stronger, it isn’t a good story for emerging markets.
How long do you estimate the U.S.-China trade fight to go on?
Both sides are far apart. I think it will persist for quite some time.
And there’s a bipartisan view that the Chinese have to be dealt with pretty strongly. Both the Democrats and Republicans have antipathy toward the Chinese, who are widely viewed as stealing our intellectual property — [like] technology — and refusing to open markets.
What repercussions will the trade war with China have on the U.S. economy?
If you’re going to take a trade war, what better time than right now with the economy so strong? It could slice a tenth or two [of 1%] off GDP and maybe add a tenth or two-tenths [of 1%] to inflation. But I think the economy can tolerate that.
Just how large is Trump’s influential base of supporters?
You can divide [party support] roughly into three groups: one-third Republicans, one-third Democrats and one-third independents. He has about 85% of the Republican base. Democrats have a little higher than one-third now. The key is: If 85% of the Republican base loves Trump and 85% of the Democratic base hates him, it boils down to where the independents go.
How are they being wooed in the midterms?
Trump will manipulate social issues, like football players kneeling, and play up things that the centrist voters could agree with, like “Oh my God, Kavanaugh was treated so poorly.” A lot of Trump conservatives who were indifferent about the upcoming elections have been energized by the Kavanaugh hearings. And Trump is brilliant at coming up with foils he can play off, like [Rep. Maxine Waters, D-Calif., in line to chair the House Financial Services Committee]. It looks like he’s moved the needle in a few Senate-race seats, like Tennessee, Texas, North Dakota and, maybe, Missouri.
What’s the main weakness of the Democratic Party at this juncture?
The Democrats lack a clear agenda. They need some fresh blood and fresh ideas. Trump intimidates his own party into supporting him, and the Democrats haven’t been all that successful in opposition. So it’s a two-fer for Trump. It amazes me that the Democrats don’t hit back harder, though Michael Avenatti [Attorney for Stephanie Clifford, aka Stormy Daniels] does, and [Sen.] Elizabeth Warren [D-Mass.] — who is definitely running [for president] — will hit back pretty hard.
Wall Street is giving more money to the Democrats in the midterms than the Republicans, according to The New York Times. What brought about this change?
Because it appears that the Democrats will control the House, I think Wall Street wants to be sure their bets are covered in that likelihood.
Any advice to financial advisors on how they can best help their clients at this time?
There are more challenges now than there were a year ago, largely because of interest rates. But advisors need to explain to clients that a modest rise of rates is nothing to worry about if the rise is because the economy is doing well. If the rise is because we’ve got an inflation problem — which I don’t think we have — that’s a different story. Inflation is fairly well contained. But the Fed has to make sure it doesn’t go any higher than where we are now — the low 2%’s [2.3% through September 2018].
How should FAs be talking to clients about bonds, then?
In a diversified portfolio, there’s still a place for bonds. But I think investors have to accept the reality that interest rates are going higher. And that isn’t the most positive environment for the bond market.
Any advice to advisors on how investors should cope with Trump’s contentious tweets and remarks, which can be unsettling?
Investors should divorce the economic fundamentals from Trump’s tweets and all those annoying controversial things he does. The fundamentals are wonderful. Trump is very irritating background noise that doesn’t really affect the economic fundamentals.
How important to the big picture is the president’s refusal to make public details of his tax returns?
The devastating portrait in The New York Times of how he manipulated the tax laws has had virtually no impact. The people who are really agitated by what he did already disliked him. So I’m not sure the story produced any fresh anti-Trump voters. Trump has the thickest coating of Teflon of any politician I’ve seen in my career!
How do you see the Russia Investigation proceeding?
[Special Counsel Robert] Mueller has made it clear that there won’t be any [more] indictments between now and Election Day. Maybe a report could come from his office during the period of Thanksgiving to mid-December. He feels he doesn’t have the authority to impeach. [But] he can amass all sorts of evidence and send it to Congress to act [on] however they wish.
Any other worries about international matters?
Brexit. The deadline is March 29, but [Prime Minister] Theresa May isn’t close to a deal to extricate the U.K. [from the European Union]. I think that’s going to be a big story.
— Related on ThinkAdvisor:
- How Greg Valliere Sees ‘the Nastiest Election of Our Lifetime’
- Will the Market Crash If Trump Is Impeached?
- Trump Impeachment Odds Have Increased Dramatically: Valliere