Jeremy Siegel, WisdomTree senior economist and Wharton School professor emeritus, offered his views Friday on different potential U.S. election results and their likely effects on the financial markets.
Siegel, speaking on a WisdomTree webcast, noted that the public may not know the results Tuesday after the polls close, although he said markets may react anyway.
The economist also said he did not consider the S&P 500 an expensive market outside the Magnificent 7 tech mega-cap stocks, with a price-to-earnings ratio around 18, "which is very reasonable in today's world." And, he said, "the Mag Seven are an amazing group that keep on growing."
Siegel made predictions of what may happen if the election yields a split government between the presidency and both or either congressional houses, a Republican sweep of the White House and Congress or a Democratic sweep.
At issue, primarily, is the looming negotiation over the sweeping GOP tax overhaul of 2017, most of which is set to expire on Dec. 31, 2025, resetting tax rates to their previous levels and halving the estate and gift tax exemption. Republicans want to extend the cuts — which could cost $4.6 trillion over a decade — while Democrats want to let most of them expire.
Betting markets aren't counting on either a Democratic or Republican sweep of the presidency and Congress, Siegel noted.
Boiling down the likely market reaction to either scenario, though, Siegel predicted that a Republican sweep would be bad for bonds and good for stocks, while a Democratic sweep "would be better for the bond market, but worse for the stock market."
A split government would be better for bonds and could be promising for stocks, he suggested.
If the election gives Republicans control of the White House and Congress, "I would not be surprised if we saw bonds spike 20 basis points," Siegel predicted, citing "fear that every tax cut that Trump wants can be enacted."
Siegel doesn't think Republicans would enact all those tax cuts, but he said movement in the bond market is like a shot across the bow, "saying 'Hey guys, don't act irresponsibly, you have to finance … $1.8 trillion worth of debt. And if you think you can raise that to $4 or $5 trillion a year, you're fooling yourself.'"
That's how the bond market warns politicians, he added.
