Wall St. banks on fiscal stimulus taking center stage under next president

Move over Fed. Wall Street says it’s Uncle Sam's turn to get the U.S. economy humming again.

With the days of low-interest rates likely nearing an end and Federal Reserve monetary policy losing its power to stimulate growth, Wall Street pros say fiscal policy — government moves to boost economic growth through infrastructure spending, pro-growth tax policies and other means — is what’s needed to boost the economy and stocks.

Wall Street says now's the time for the passing of the baton from stimulus generated by low interest rates to government-driven moves that put more money in Americans' pockets and spur spending by lowering taxes and creating more full-time and higher-paying jobs. Indeed, even though the September unemployment rate was 5% and near full employment, an estimated 5.9 million workers were working part-time because their hours were cut or they couldn't land a full-time job, according to the U.S. Bureau of Labor Statistics.  And it doesn't matter who wins the White House. Investors are going to be calling for government to push a growth agenda whether it's President Clinton or President Trump.

“Regardless of who wins the U.S. presidential race, we see an inevitable shift away from monetary policy toward fiscal policy in the next several years,” Don Rissmiller, economist at Strategas Research Partners, said. “The nature of any coming fiscal stimulus will likely determine whether the global economy can break its (long-term) stagnation.”

Both presidential candidates are proposing healthy dollops of fiscal stimulus. Front-runner Hillary Clinton has promised the “biggest investment in American infrastructure in decades,” backed up by her $275 billion commitment to put Americans to work to fix the nation’s aging roads, bridges and airports.Clinton also promises tax breaks for working Americans. Trump has promised a pro-growth tax-cut plan that he says will spur job growth and boost economic growth.

Hank Smith, chief investment officer at Haverford Trust, says there’s a chance the U.S. economy, which grew at a 1% rate in the first half of the year and is on track for growth of about 2.5% in the third quarter, could grow at a faster 3% to 3.5% clip if the next president passes pro-growth fiscal policy. "We could see the so-called 2% recovery accelerate to a 3% recovery," Smith says.

Under Trump's tax plan, which would cut the average 2017 tax bill by $2,940 with the biggest savings going to high-income earners, according to the Tax Policy Center, a think tank that considers itself non-partisan, the U.S. economy would get a boost in the short-run, with its two models showing gross domestic product getting a boost of 1% to 1.7% in 2017 and a 1.1% lift in 2018. However, when accounting for his proposals, including a tough stance on trade, Oxford Economics says a Trump presidency could knock "5% off the level of U.S. GDP relative to baseline" and put a global economic recovery in jeopardy.  However, Oxford noted that Trump would likely be forced to negotiate with Congress more than he suggests and that would offset negative impact.

In contrast, Clinton's plan to boost taxes on the wealthy would reduce their after-tax income by 7%, and increase after-tax income for low- and middle-income families by nearly 1%, would result in a drag on GDP, with estimates showing a 0.1% to -0.4% drag in 2017 and a hit to GDP of 0.2% in 2018, according to the TPC's analysis. However, when her broader plan is layered in, Clinton’s tax, spending, immigration and minimum wage proposals, which include spending, immigration and minimum wage proposals would put GDP growth at 2.9% in 2017-18, according to an analysis by Oxford Economics.

Still, the scope of fiscal stimulus will likely be limited due to increasing odds that the U.S. Congress will be divided following the Nov. 8 elections.

Wall Street is most comfortable with a status quo government in which a divided Congress will provide checks and balances to whatever party lands in the White House, making it less likely that one party's platform sails through uncontested. The two election outcomes Wall Street fears most is a so-called Democratic sweep in which Hillary Clinton wins the presidency and Democrats regain control of both the Senate and House of Representatives. Similarly, a Trump win and a GOP-controlled Congress is also feared.

Divided government, it turns out, is the big caveat for those expecting a massive dose of fiscal stimulus, according to Morgan Stanley. For example, a Clinton presidency and split Congress, will make it more difficult for Clinton to pass her infrastructure plan in its entirety but would offset the impact of tax hikes. What’s more likely is what Morgan Stanley calls “an incremental policy path,” or less drastic policies getting pushed through Congress.

"Monetary policy has done most of what it can do to boost growth," Rissmiller says. "Government investment in infrastructure could be helpful here."