http://www.aei.org/publication/what-happens-if-investors-think-trump-will-win-the-white-house/What happens if investors think Trump will win the White House?James Pethokoukis
3-2-2016
Donald Trump won a whole lot of voters, states, and delegates on SEC Super Tuesday, a big step toward securing the GOP presidential nomination. (Quick contrarian take: The “whisper estimate” was for an 11-state Trump sweep, including Texas. Instead he lost four states, almost lost three more, got over 40% of the vote in just two states, secured just 42% of the delegates, and just 35% of the vote. As FiveThirtyEight’s Harry Enten tweeted: “Yes, folks it’s clear this is over. Oh wait.”)
If you’re an investor, certainly time to begin thinking about how markets would react to a Trump-Clinton WH race, not to mention begin positioning a portfolio for a possible Trump presidency. Here is one take on that, from Brian Gardner of Keefe, Bruyette & Woods:
For now, we do not think markets have priced in a possible Trump presidency. A CNN poll yesterday showed Clinton beating Trump 52-44 and we think investors believe the poll and expect Clinton will win. …
If Trump’s chances of winning the presidency start to improve, we expect the markets will react negatively and a risk-off trade would ensue. His views on trade pose a risk to the global economic system and the protectionist policies he espouses could disrupt the global supply chain. Most Trump proposals lack detail and he is highly unpredictable so we think investors will react negatively if he gains traction in the general election. The lack of specificity in Trump’s proposals make forecasting winners and losers difficult but we see the following. Winners from a Trump win: defense, U.S. Treasuries, exchanges (volatility play), energy (coal). Losers: retail and consumer.
The bit about a “negative market reaction” brings me back to my “Trump Doom Loop” scenario. The more likely a Trump win, the worse the markets perform, increasing the odds of a Trump win. Rinse and repeat. As I recently wrote in TheWeek:
Trump’s continued success, however, could create a political-economic feedback loop in his favor: He continues to win primaries, so investors get spooked and sell stocks. Weakening markets and declining 401k balances hurt consumer [and business confidence] and spending. The so-so economy slows further and job growth slips. This then strengthens the GOP argument that Obamanomics is a bust. America can’t risk a de facto third Obama term with Hillary in charge. Time for a change. Time for Trump.
Now this scenario may well be based on an unfair appraisal of Trump-onomics. POTUS Trump’s economic policies might be substantially different from Candidate Trump’s agenda. We don’t know to what extent his ideas are negotiation markers vs. items he intends to push more or less as they are. A $12 trillion tax cut or Simpson Bowles tax reform? Trade wars with Canada, China, Mexico or mere trade tinkering? Lots of uncertainty, then — which is the point. Lots of US political and policy uncertainty during time of global economic uncertainty.
And what about a Hillary Clinton presidency? One final bit from KBW’s Gardner:
Investors are probably taking some solace in the view that if Clinton wins, Republicans would keep the House and gridlock would prevent Clinton from passing much of her agenda like drug price restrictions. That view may be flawed because the Republican Party might be undergoing a fundamental transformation that tears it apart. While we think odds favor the GOP retaining the House, the chances of Democrats winning back the House cannot be dismissed.
So a Clinton landslide could bring total Dem control of Washington, including the Supreme Court. This scenario also presents interesting issues for investors.
