High Net Worth Clients Are ‘Deathly Afraid’ of a Warren Presidency. What Can RIAs Do?
An advisor playbook for the 2020 election.
As one of the most polarizing presidential elections in modern history heats up, financial advisors report that clients are expressing concern about the fate of their investment portfolios.
Though Americans won’t begin voting in state primary contests for almost four months, investors can read the poll numbers like anyone else. And many are telling their advisors they they’re worried about would happen if Sen. Elizabeth Warren, D-Mass., a Wall Street-bashing progressive who has been rising in the polls in recent weeks, wins the Democratic nomination and then defeats an embattled Donald Trump next November.
Ken Van Leeuwen, founder and managing partner of Van Leeuwen & Co., a $250 million-asset under management financial planning and investment advisory firm based in Princeton, N.J., says that many of his high net-worth clients “are deathly afraid that a progressive candidate in the Democratic party like a Warren could be elected and they’re concerned that they money that they have worked so hard for will be further taxed.’”
Such a scenario seemed far less probable just a few months ago. But Warren has been closing the gap in the national polls against the prohibitive Democratic front-runner, former Vice President Joe Biden. She’s even ahead of the more moderate Biden by roughly three percentage points in the first two state contests – in her neighboring state of New Hampshire and in Iowa, according to recent polls averaged by Real Clear Politics. And the collective wisdom of users on online betting websites PredictIt and Ladbrokes currently show her as a favorite over Biden to win the nomination.
Meanwhile Trump, whose pro-business policies have been viewed as positive for the stock market, appears politically wounded as he faces a possible impeachment vote in the Democratic-controlled House of Representatives amid charges of abuse of power. Calls for impeachment gathered momentum following recent revelations that Trump urged the president of Ukraine to investigate Biden and Biden’s son, Hunter, about the latter’s business dealings in the Eastern European country.
Currently, Trump trails Warren by five percentage points in the Real Clear Politics average of recent national polls, though it must be remembered that Hillary Clinton defeated Trump by more than two percentage points in the popular vote in 2016 but lost the election in the Electoral College. On betting sites, Trump still has the edge over his leading Democratic opponents for the general election.
The only thing that’s certain at this point is how wide open the presidential race is. That’s why advisors interviewed by RIA Intel have been selling off stocks ahead of the election and even underweighting shares of the kind of large-asset commercial banks and Wall Street firms that could be in the cross hairs of a Warren presidency.
Others investment advisors, however, are urging clients to tune out an election that’s still a year off and focus instead on the myriad economic factors that normally drive stocks.
“There is a lot of time between now and November 2020 and there are a lot more things that will have a bigger impact on your portfolio and you should pay attention to those things first,” says Steven L. Skancke, chief economic advisor with Keel Point, a Huntsville, Ala.-based wealth management firm with more than $2 billion in assets under management.
Aside from the normal market fundamentals such as macroeconomic data, corporate earnings results and interest-rate movements, the ongoing trade dispute with China has pressured stocks, particularly in recent months. However, stocks have risen sharply since late last week on news that the U.S. and China have agreed on an initial phase of a deal. “Will the trade war escalate or will there be a cessation of the fighting?,” asks Skancke. That’s a more critical question right now, he argues.
Richard Bernstein, the chief executive officer of New York-based Bernstein Advisors, says that investors should be reminded that what candidates call for in elections often doesn’t come to pass, either because they moderate their stances in a general election or because they are stymied by at least one house of Congress.
Right now, it appears that the Senate has better than a 50-50 chance of staying in Republican hands following next year’s election, according to several Congress watchers. “One has to remember that politics is about what should be and investment is about what is,” Bernstein adds.
Nonetheless, the results of the last presidential election make the case that elections do matter for markets. Stocks rallied the day after Trump won an upset victory in 2016 as investors absorbed the reality of a president-elect who was calling for a corporate tax cut and reduced regulation for financial institutions, energy companies, and other businesses large and small. And shares kept on climbing in the following months – in what became known as the “Trump Bump” -- as the president and a GOP-controlled Congress delivered on those campaign promises.
Market pundits suggest that Biden would arguably be the best of the leading Democrats in the race to replace Trump – purely from an investing perspective. Once known as the “Senator from MBNA” because of his close ties to the former Delaware-based credit card company, Biden has no plan to break up large financial institutions, unlike rivals Warren and Vermont Sen. Bernie Sanders. And he strongly opposes the creation of a government-run “Medicare for all” national health plan. “The markets think they understand what a Biden presidency would look like because they know what the Obama presidency looked like,” says Keel Point’s Skancke.
Warren, on the other hand, wants to redefine U.S. capitalism. She has called for separating commercial banking from investment banking, banning fracking to extract fossil fuels, and effectively eliminating the private health-insurance industry to create a national health plan. She’s also called for undoing many of the Trump-era reductions in corporation taxes and business regulations, as well as imposing a 2% tax on household net worth over $50 million.
While even a Democratic-controlled Congress wouldn’t likely support such a progressive agenda, there are other ways Warren could flex her executive clout to achieve some of her goals in the first days of a presidency. “Trump started rolling back environmental regulations right away and I would expect that she would reimpose many of the same environmental regulations and that would impact any new company that wants to build a new plant in the United States,” Skancke says.
David Kotok, chairman and chief investment officer of Cumberland Advisors, a Sarasota, Fla.-based investment advisory firm with $3.5 billion in retail and institutional assets, says his firm is underweighting the shares of big banks that would be targets of a Warren presidency and overweighting small regional and community banks. However, he hasn’t moved yet on other sectors such as energy and health care.
Van Leeuwen, meanwhile, has been trimming stocks and building cash positions in the event that the markets swoon because of pre-election fears. “Warren is gaining so if a client needs cash in 2020 or beyond, we want to raise that cash now and not be forced to sell into potentially lower prices.”