(Donald Trump and Hillary Clinton.AP Photo/David Goldman)
With the presidential election just over five weeks away, economic strategists are trying to prepare for all possible outcomes and the respective risks they present.
The election has become one of the "most significant near-term risks" for the economy and markets, according to a note by Bank of America's macro team, led by Lisa Berlin.
On the downside, the team notes concerns over trade and the Fed, but on the upside, we could see some additional fiscal stimulus.
Regardless of a Democrat or Republican in the White House, the risk of a slowdown due to uncertainty in the coming months is high.
Who's it going to be?
As the debates go on and millions of viewers weigh in, the polls and political-betting-market odds are constantly changing.
The BAML note presents two prediction measures that suggest different results. Political betting markets like the Iowa Electronic Markets and PredictWise predict that Clinton has a 70% to 75% chance of winning the election. Meanwhile, Nate Silver's FiveThirtyEight, a polling aggregator, has shown a dramatically closer race, with Clinton's chances recently hovering at only around 60%, although in the wake of polling after the first debate, Silver's model shows somewhat improved odds for Clinton.
According to the betting markets, the likelihood of Republicans retaining control of the House is high, running at 70% to 90%, and the probability of Democrats taking control of the Senate is almost a coin flip at about 40% to 60%.
(BAML)
The note thus suggests that the most likely outcome is a split government, with Clinton in the White House and Republicans controlling the House, continuing the gridlock in Washington. This outcome is assumed in the team's baseline economic forecasts and doesn't present big policy changes.
A Republican sweep, however, could lead to a sell-off in the markets and delay a December rate hike by the Fed.
Three key policy areas that have the team at BAML concerned are fiscal spending and tax policy, foreign-trade policy, and attitudes towards the Federal Reserve.
Fiscal
The team expects only modest fiscal stimulus under either administration.
According to the note: "The Committee for a Responsible Federal Budget (CRFB) estimates that Clinton’s plans would be largely deficit neutral, adding about $200bn to the debt level over the coming decade. By contrast, they estimate that Trump’s plans would add a much larger $5.3tn over the decade. Clinton’s plan consists of nearly balanced increases in taxes and increases in spending, while Trump’s plan is dominated by a major tax cut."