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Will Elizabeth Warren wreck the stock market?

What will happen to markets if Warren is elected president?

There is fear in the financial and big-business community of what will happen if Warren actually wins the presidential race next November.

“There's plenty of fear.” Says Rick Newman on Ballots and Dollars podcast. “Just recently we've had investors, some famous investors, Leon Cooperman and Paul Tudor Jones, among them coming out and predicting that the stock market could fall by 25% or more if Elizabeth Warren becomes president.”

Newman also acknowledged that predictions like this have been made before in previous election cycles.

“I understand why they think that, because looking at her plans on paper, it's pretty intimidating if you're looking at it from the perspective of an investor buying stocks. But I went through this with Trump in 2016 and all of the predictions about what would happen to the economy if Trump became president, and that obviously didn't happen.”

For the full conversation, listen to Ballots and Dollars today.


Rick Newman: From Yahoo Finance, this is Ballots and Dollars, a podcast about the politics that affect your pocketbook. I'm Rick Newman.

Alexis C: And I'm Alexis Christoforous. And this week we are talking about Elizabeth Warren's rise in the democratic primary polls and how that seems to be rattling Wall Street. So the Senator from Massachusetts we know has made corporate greed, sort of the central theme of her populist campaign. But Rick, are investors right here to fear a possible Warren presidency?

Rick Newman: Well, we will never know until and unless she becomes president, of course, but there's plenty of fear. Just recently we've had investors, some famous investors, Leon Cooperman and Paul Tudor Jones, among them coming out and predicting that the stock market could fall by 25% or more if Elizabeth Warren becomes president. And I understand why they think that, because looking at her plans on paper, it's pretty intimidating if you're looking at it from the perspective of an investor buying stocks. But I went through this with Trump in 2016 and all of the predictions about what would happen to the economy if Trump became president, and I-

Alexis C: It was going to crash. Recession.

Rick Newman: I wrote some of those stories, I have to acknowledge, and that obviously didn't happen. So there was a lot of analysis, and these were by premiere forecasting firms looking at basically what they could figure out about Trump's plans because he was much more slapdash back then. He did not have finely articulated plans on a website the way Elizabeth Warren did. He had some broad brush things he wanted to do, and then he had a lot of things he would say over and over again at rallies and in interviews. So some forecasters tried to piece together what they thought his plan was and predict what effect that would have on the economy. And they were all terrible.

Alexis C: Let's tick through some of these. So one of them was that Trump was going to impose 45% tariffs on Chinese goods and Mexican goods. Neither one of those things has come to pass.

Rick Newman: Right, so if you go back in time, Trump was railing against basically all imports or every country where we had a trade deficit, which is most of them, but the biggest were China and Mexico. So he said he would impose tariffs of 45% on all Chinese imports and 35% tariffs on all Mexican imports except for oil. Now there have been no tariffs on Mexican imports.

Another thing Trump said he might do is just completely pull out of the North American Free Trade Agreement so we'd no longer have free trade with Mexico and everything would go back to, they would tariff our imports, we would tariff their imports and so forth. And that did not happen. We have a re-negotiated NAFTA, which has not yet been approved, so the old NAFTA is still in effect. There's actually been no change yet, but Trump has negotiated this new deal that would replace it. But he hasn't done those terrible things with regard to trade with Mexico.

On China, he has imposed some tariffs on some Chinese imports, as we've been reporting on quite a lot, but they're nowhere near 45% and they're not across the board either. So they range from fairly low tariffs, I think as low as 10%, and then some go above 25% but on the whole we're nowhere near 45% on all Chinese imports. So to go back to those forecasts, those forecasts were an attempt to figure what would happen if Trump did everything he said he would do, and Trump has not done everything he said he would do. Just to get to one other thing. Trump, everybody will remember this, said he was going to repeal the Affordable Care Act and he didn't do that either. So the reason we're talking about this is there's a big difference between Elizabeth Warren's plans on paper and what she actually would be able to put in place, in practice if she became president, and that's what I'm talking about.

Alexis C: Her bark is worse than her bite. It was the same with Trump. So let's go through some of the things you think Warren would have a nearly impossible time actually getting past, if she were to make it to the presidency, and I want to begin with fracking. Warren has said she wants to ban fracking. What do you think the likelihood is, even if she were to step into the presidency with both a democratic house and Senate, what's the likelihood that that happens?

Rick Newman: I don't think she can do it. A president doesn't have the power to just put an industry out of business. I guess it's theoretically possible you could pass some law that in effect would make fracking... you could put a tax on it, for example, that would be so high it would make it cost prohibitive. I just don't think that's plausible, and I know why she wants to do it. It's not that she doesn't have anything against fracking per se, that's her way of getting out of fossil fuels into renewable energy. So that's her big pitch to environmentalists and people who support the green new deal. There are a lot of jobs in fracking. There's talk of Democrats possibly winning Texas either if it's a house seat, a senate seat or even taking it at the presidential level.

If Elizabeth Warren is the nominee, it seems impossible to me because one of her things is banning fracking, which is a major industry in Texas. also a big industry in the rust belt; Ohio, Pennsylvania. I'm from Western Pennsylvania. I have relatives there who are telling me how strong the economy is in part because of new types of energy jobs there in North Dakota, South Dakota. I mean you can't just come into the white house and declare all these industries dead. I mean it's just kind of politically impossible. So she could probably find ways to use executive action, which is what Trump has done, to increase the rules and the regulations around fracking, which could make it harder to do and more expensive to do. But I think the political reality is this idea and others like it, she's appealing to people on the left, environmentalists on the left and others. I just don't think she can do it politically.

Alexis C: What about the hot button issue of Medicare For All? She says she wants to pay for it by taxing the rich. How likely is it that that plan becomes reality?

Rick Newman: Well put aside for a moment how much it would cost, and we have to keep in mind that Medicare For All means you're moving about 170 million people off of private insurance into a government plan.

Alexis C: That's a lot of people.

Rick Newman: We've talked about this a bunch of times on our podcast. Everybody loves to bash insurance companies and Elizabeth Warren says she doesn't know anybody who feels good about their insurance company. She's actually wrong about that. There are good surveys that show most of the people who get insurance through their employer feel that that's a pretty good deal. They like their insurance, they feel they have good access to doctors. They probably don't express it as love for an insurance company, but you'd basically be taking away from people something that is really important to them that they're pretty happy with and trying to convince them that this government plan will be better.

So I think that's an example of something she can talk about that all they want. I think that is politically implausible and I don't think she'd get that even if she had Democrats controlling both the house and the Senate.

Alexis C: And you think that's maybe because some of those lawmakers would have constituents who would just bark too loudly about it and they couldn't vote for it?

Rick Newman: Yeah, and I think once you actually start to talk about Medicare For All as actual legislation that you're considering passing, people will start paying more attention to it. I don't even think it's going to get as... I mean there is legislation already to do this, but if this starts to look like it actually might get a vote in Congress, people will start paying more attention. They'll start to realize what it means, how many people are going to lose the insurance that they actually like.

Just to go back to the Affordable Care Act, that only affected about 5 million people in terms of the insurance they had at the time that they would no longer be able to keep because the rules changed and those policies were no longer valid. So about 5 million people lost the insurance they had. And look at the uproar over the Affordable Care Act for just 5 million people. So take 150 million, at least, 170 million when you include people who buy that insurance themselves, it's multiples of how controversial Obamacare was and it's just not going to happen.

People also would start paying attention to the cost. And this is again, this is the money, is what these big investors are talking about and looking at when they focus on what would happen to the stock market. So Elizabeth Warren says her plan would cost, what does she say? $2 trillion per year. She's off by about $1.4 trillion there. Other third party estimates are in the range of $3.4 trillion per year. Where's that money going to come from when you start looking at it? She recently said it's all going to come from business taxes and billionaire taxes, but she also is underpricing it. So we'd have to come up with more taxes. And this is why there's the concern about, "Wow, the stock market is going to hate this" because she's raising taxes on businesses in a bunch of different ways. So first of all, she wants to-

Alexis C: She wants to tax financial transactions like stock trades, which would affect all investors.

Rick Newman: There's that. Financial transactions are financial firms. So that's a tax on financial firms, or it would be directed at financial firms and she'd probably find a way to direct it at institutional investors rather than mom and pop. But it all becomes kind of the same thing at some point. I mean, if transaction costs go up on banks, they're likely to charge more fees to their customers or just try to recoup it somehow. So here are all the taxes she's thinking about. So there's that financial transaction tax, that's basically banks and trading firms. She wants to repeal the 2017 tax cuts, so the corporate tax rate would go back up to 35%, it went down to 21% so she'd put it back up to 35%.

Alexis C: I would think that has a pretty good chance of passing, depending on the makeup of Congress if she would become president.

Rick Newman: I don't think it would go back to 35. I don't think it would be prudent to push it back to 35. Let me just finish my list.

Alexis C: All right, well I'm just jumping in there because I think that's something that can happen.

Rick Newman: We'll come back to that. She also has this corporate surtax idea. So any big company that makes more than a $100 million in profits, there'll be an additional 7% tax on that. And then some smaller taxes here and there, and there's also the wealth tax on the billionaires.

Alexis C: Which she shares with Bernie Sanders.

Rick Newman: So this is why investors are worried. What all of these things combined would do is they would lower corporate profitability, and so you lower corporate profits, by definition you're going to lower the value of firms and that means stock prices are going to come down. But that's only if all of this stuff actually happens. And again, I go back to Trump, there's a lot of stuff he talked about doing that he either gave up on doing or he was just not able to do. And Elizabeth Warren would have the same problem if she became president.

Alexis C: Well let's get down to brass tax if we can, and talk about those tax proposals that do stand a chance. So you think the corporate rate could go up but not by as much as it was prior to the Trump presidency, but it would go up?

Rick Newman: I do, but I think Democrats would have to win the House and the Senate and the White House to do that. But I think it's quite plausible that the corporate rate could go up from 21% where it is now. I think Democrats could raise it to 25% or perhaps even 28% if they felt they needed. You would only do that if you wanted the money to pay for something else. So you wouldn't do it just to raise money for no reason ,and nobody cares about paying down the debt anymore, so you probably wouldn't do it for that reason. But if Joe Biden became president for example, he doesn't go nearly as far as Elizabeth Warren in most of his plans, but he has ideas, and it's possible that a more moderate guy like Biden could say, "We need a little bit of revenue. We're going to ask corporate sector to give a little bit back." I think that's possible.

There's fairly broad agreement that the corporate tax rate of 35% was too high. And it's not relative to what anybody else pays in the United States, but it's relative to all the other developed countries in the world, which have all lowered their corporate tax rates over the last couple of decades, because everybody wants corporations to come and base themselves in their country, so they make it more attractive. It's hard to have a 35% tax rate in United States when it's 12% in Ireland. And if you remember during the Obama years, we had these corporate inversions and other ways U.S. Companies would try to figure out how to escape the U.S. tax burden and they would try to get bought by some company overseas or sell them.

Alexis C: So they could be domiciled there.

Rick Newman: So they could be headquartered someplace else. If you went back to 35% you'd have all those problems all over again. And she wants to put up these exit barriers that would make... you'd have to pay an exit fee for example to get out of the country. But all of that stuff, I mean that's not a free enterprise economy anymore. That's too many clubs in the economy banging on corporations, and that would hurt the stock market. I just don't think it's ever going to happen.

Alexis C: What about her grandiose idea of paying for college tuition, free college for all? Again, I'm hearing taxes going up as we speak.

Rick Newman: Yes. And I think... so she's had all these programs and then all these taxes to pay for these programs, and now she's been shifting around which taxes would pay for what a little bit, but I think the wealth tax would not pay for Medicare For All. That would pay for education reforms and for free tuition and also student debt relief. So she'd pay off student debt for not everybody, but for a lot of people. But interestingly, she needed more money when people started saying, "Well, you've got to tell us how you're going to pay for Medicare For All." So she actually made the wealth tax, she raised it or made it more onerous. So she raised the rate on people with more than a billion dollars in wealth. And she's raising it to a point where she's actually going to detract from their wealth over time so that you would have less and less money if you're a billionaire, and that's not the greatest idea.

It's fine to extract some money from the wealthy if they can still earn a positive rate of return on their investments. Everybody thinks "Oh, "they have so much money they won't even notice. I don't know about that. I mean, Jeff Bezos has a lot, a lot of his money is Amazon stock. So his wealth is actually invested in Amazon and they're earning a very productive return on Amazon, which is one of the most innovative U.S. Companies there is. So I don't know how far you want to really rein that in. But again, Congress would have to approve a wealth tax and even if Elizabeth Warren is a left leaning progressive and even if some progressives in the Democratic party like her, we don't have a leftist country. We have a centrist and possibly a center right country. And it's just not going to work for Congress to do something that is basically out of step with where people want to go.

Alexis C: For as much as she bashes the 1%, bashes corporate America, I'm wondering if Warren were to become president, how much she would be held captive by what's happening in the stock market. We see during president Trump's time in office, he likes to take credit for when the stock market is doing well and likes to blame the fed when it's not. But can a president be successful at a time when the stock market is not?

Rick Newman: It's a great question because Elizabeth Warren acts like ordinary people have no interest in the stock market, and no need for the stock market, this is only something for billionaires. It's like just a billionaire's playground and it doesn't matter to anybody else. And again, she's wrong about that. I looked up the numbers and Gallup tracks these numbers on an annual basis, 54% of Americans own stocks in some form. They're not all day trading, but that's what people's 401(k) plan is, it's what an IRA, it's where you invest your retirement money. It's pension funds.

Alexis C: So they do have exposure to the ups and downs of the stock market.

Rick Newman: Absolutely. Normal people, the middle class, cares about the stock market. It's not maybe the number one concern they have. I think if you're a homeowner, if you own a home, the largest source of your wealth is probably your home. That's where you have the most money. But every time the stock market goes down 5%, people start looking at their 401(k), they get very antsy. Other news networks that cover general news, call us up and say, "What's going on the stock market? Can you come on and explain to us?"

Alexis C: Suddenly Wall Street meets Main Street.

Rick Newman: The world cares. Everybody cares when the stock market goes down. So she acts like this would only affect billionaires, she's totally wrong about that, and I think if Elizabeth Warren got into office and proposed all these things and the stock market went down 10% and she thinks she would just have this attitude like, "Well that's not our problem, that's the billionaire's problem." She's totally wrong. People look at their 401(k) plan. Their sense of wellbeing is tied to the assets in their retirement plan. There's this thing called the wealth effect which is psychological. When things are going well, if you feel like home values are stable and you've owned your home for a while, you're building wealth in your home, you look at your 401(k) account, you're making contributions, you're seeing the value go up because the investments are earning you a positive return, you're going to be more willing to spend money. When you see those assets falling in value, you're going to be less optimistic and you're going to be less willing to spend money.

And this psychology matters for the economy, where we follow consumer spending all the time. And it's not just consumers buying what the bare minimum of what they need. It's them buying stuff they want because they feel optimistic about the future. And when we have a downturn in the stock market, they don't. That can contribute to a recession and that can make life miserable for a president. So she needs to care about stock market if she becomes the president.

Alexis C: And also when you look at Trump and presidents prior, when they do try to get aggressive about their agenda and the market sort of answers back, they back off.

Rick Newman: That's right. The stock market holds them in check. It's funny how many things we can point to in the Trump presidency that might be illustrative of a Warren presidency, but this is another one. Trump probably has gotten very skittish about imposing any additional tariffs on China because the stock market doesn't like it. The stock market is very clear. so stocks go down when there's bad news. When Trump imposes some new tariff or when he generally when he first announces a new tariff, but stocks also give the other message, and the stock market goes up when it seems like there's going to be some relief from the tariffs or other parts of the trade war. In fact, that's been happening recently, as it looks like we might get a phase one, whatever that is, phase one deal with China, stocks have been drifting upward. Trump notices that.

Alexis C: Especially in an election year, Trump notices that.

Rick Newman: Especially in an election year and you can really kind of tell, like Trump probably feels he's gone about as far as he can go with tariffs because the stock market isn't going to let him go any further. He could say, "I don't care what the stock market does," but the fact is he does care and he should care.

Alexis C: All right, so I think the message here is Wall Street, don't start losing it just yet.

Rick Newman: I'll tell you, there is one other factor here which is Trump said he would do a lot of things that would have harmed the economy and the stock market if he had actually done them. But he did have one sort of Trump card, if you will, which was the tax cut. So that was something clearly good for the stock market, and Elizabeth Warren doesn't have something like that. So Trump had some negatives, but that one positive thing, and he's also been deregulating, which in general is good for corporate profits. Elizabeth Warren doesn't have that Trump card, if you will. There's nothing on her agenda that I know of that would actually be a net positive for the stock market. So she could spook investors for sure and there's nothing she can wave that will make them happy, so you could get sort of a gloomy investor sentiment under Warren but not something that I think is going to crush corporate profits as much as all of her taxes on paper make it sound like she would.

Alexis C: It would be uncharacteristic for her to come out with some plan that would really benefit investors in the stock market. But you know what? We're early on in the process. Still have months to go before we all head to the polls, we want to thank everybody for joining us and for taking a listen to this podcast.

Rick Newman: And for putting up with my scratchy voice. I will beat my cold by the next podcast.

Alexis C: It's the dulcet tones of Rick Newman, and we love them.

Rick Newman: Not today.

Alexis C: And thanks so much as always for sharing your thoughts with us, Rick, and be sure to follow us. I am @AlexisTVNews.

Rick Newman: And I'm at @RickJNewman. Be nice.

Alexis C: Yeah. Be nice when you rate and review too, and we'll catch you next time with a fresh podcast.

Rick Newman: Bye.