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To financial markets, the 2016 election will barely matter

It will be the biggest show of the year. And on Wall Street, it may signify nothing at all.

The 2016 presidential election is already filled with drama and portent. Will Trump fade or continue to steal the show? Will Sanders the socialist disrupt the relentless Clinton machine? Will rich donors buy the next president? Will the Beltway power base shift or remain intact?

For some segments of the population—such as immigrants or Obamacare enrollees—the outcome of this year’s election could be quite important. But don’t expect a swing in the economy or the financial markets based on whether a Republican or Democrat is the next occupant of the White House. “Meaningful reform is dependent on political consensus and political courage, which will likely remain in short supply, whatever the outcome of the 2016 election," investing firm BlackRock concludes in a recent analysis.

The leading presidential candidates do back policies that are starkly different on matters that would affect markets--if the United States were an autocracy where the chief executive alone made the laws. Democrat Hillary Clinton, for instance, would tighten the rules governing banks, kill dozens of tax loopholes, raise taxes on the wealthy and spend a lot more federal money on infrastructure projects. Republican Ted Cruz would undo the Affordable Care Act, scrap the tax code, institute a flat tax, and intervene in currency markets to assure a “stable dollar.” Virtually all the other candidates are calling for major changes that in one way or another would remake the U.S. economy.

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But big plans get a lot smaller—sometimes microscopic—once the candidate is elected and it’s time to turn campaign pledges into pragmatic legislation. It seems likely there will still be enough of a two-party split in Washington to keep the gridlock going for the next four years. Democrats, at a minimum, ought to retain a strong enough minority in the Senate to block legislation via filibuster, even if there’s a Republican president. And the House will stay Republican, even if Democrats flip the Senate and win the White House again.

That means any controversial reform, unless urgent, will probably continue to be neglected. There’s some chance that corporate tax reform—lower rates combined with fewer loopholes—could gain traction, since Republicans and Democrats both acknowledge the need to make the tax system for businesses more efficient, on par with more favorable tax regimes in other countries. But those loopholes you hear about in the fine print are actually cherished profit-enhancers for thousands of companies in dozens of industries, and they won’t readily sacrifice special treatment they lobbied hard to get.

Besides, many legislators say corporate tax reform must be part of a sweeping makeover of the entire system, including the tax code for individual filers. That seems unlikely any time soon, especially under divided government. There are bound to be winners and losers under any kind of reform, and in an uncompromising legislature, neither party is willing to be on the losing side. As depressing as it might be, mostly everything the candidates say about tax reform is irrelevant, given that the odds of change are so low.

One old saw holds that divided government is good for markets, since Washington gets nothing done and investors don’t have to adjust to new rules. But the data doesn’t support that. BlackRock examined 114 years of stock market returns and found no significant difference between years when government was united and when it was divided.

Another mistaken belief is that Democratic presidents are friendlier to stocks than Republican ones. While it’s true that returns have been higher historically under Democratic presidents, the difference is small enough to be explained by ordinary market gyrations, rather than by something Democrats actually do to juice stocks. So anybody pulling for Hillary Clinton on the basis of the historical correlation with stock returns may be confusing cause and effect.

The one policy decision that does drive markets is the level and direction of interest rates, which the Federal Reserve helps set. But even though the Fed chairman is a presidential appointee, the Fed acts independently of any branch of government, and not since the Nixon Administration has the president appeared to hold sway over the Fed.

The next president may be able to effect meaningful changes in foreign policy, the makeup of the Supreme Court, or other matters where the chief executive can act without Congress. But doing much about the economy or the markets will probably be beyond reach, as it has been for most of President Obama’s two terms. If we’re lucky, the markets won’t need the help by the time the next president takes office.

Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman .