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| Markets fear Trump's economies with the truth but Clinton isn't a cure-all Markets fear Trump's economies with the truth but Clinton isn't a cure-all | |
| (2 months later) | |
| The odds are that when the stock market opens for trading on Monday morning, its performance will hinge on just how well Donald Trump fared in Sunday night’s town hall-style debate. | The odds are that when the stock market opens for trading on Monday morning, its performance will hinge on just how well Donald Trump fared in Sunday night’s town hall-style debate. |
| The last time Trump faced off against Hillary Clinton, in a debate late last month, the markets made their views crystal clear. | The last time Trump faced off against Hillary Clinton, in a debate late last month, the markets made their views crystal clear. |
| Over the course of the debate, as futures contracts tied to the Standard & Poor’s 500-stock index (agreements to buy or sell the index at a predetermined price) traded overseas, it was possible to watch just what investors thought of a Trump presidency. With every blow Clinton delivered (discussing Trump’s tax returns, his “Miss Piggy” comments, and so on), and with every one of Trump’s own missed opportunities, the value of those S&P 500 futures contracts rose. Investors clearly decided they would prefer to own US stocks under a President Clinton than a President Trump. | Over the course of the debate, as futures contracts tied to the Standard & Poor’s 500-stock index (agreements to buy or sell the index at a predetermined price) traded overseas, it was possible to watch just what investors thought of a Trump presidency. With every blow Clinton delivered (discussing Trump’s tax returns, his “Miss Piggy” comments, and so on), and with every one of Trump’s own missed opportunities, the value of those S&P 500 futures contracts rose. Investors clearly decided they would prefer to own US stocks under a President Clinton than a President Trump. |
| In fact, Justin Wolfers, a professor of economics and public policy at the University of Michigan, calculated that based on the magnitude of the market movements during that first debate, if Trump wins the election next month, it could trigger a stock market selloff of between 10% and 12%. | In fact, Justin Wolfers, a professor of economics and public policy at the University of Michigan, calculated that based on the magnitude of the market movements during that first debate, if Trump wins the election next month, it could trigger a stock market selloff of between 10% and 12%. |
| It’s not that investors care whether Trump did or didn’t pay taxes, or that he brags about groping women without their consent. The markets just don’t worry about that kind of stuff. | It’s not that investors care whether Trump did or didn’t pay taxes, or that he brags about groping women without their consent. The markets just don’t worry about that kind of stuff. |
| What does matter is whether investors believe Trump will create a stable, predictable, business-friendly environment. For all his claims to be friendly toward business, and despite a platform that offers favorable tax treatment to corporations and the wealthy, clearly investors are bothered about the “stable and predictable” part of the conundrum. | What does matter is whether investors believe Trump will create a stable, predictable, business-friendly environment. For all his claims to be friendly toward business, and despite a platform that offers favorable tax treatment to corporations and the wealthy, clearly investors are bothered about the “stable and predictable” part of the conundrum. |
| Trump has threatened to embark on trade wars – that’s enough to strike terror into the heart of any investor. Then there are some “black swan” risks to which analysts have begun alerting their clients, such as the potential fallout for financial markets if Trump pulls the US out of multilateral trade and security arrangements, from Nafta to Nato. | Trump has threatened to embark on trade wars – that’s enough to strike terror into the heart of any investor. Then there are some “black swan” risks to which analysts have begun alerting their clients, such as the potential fallout for financial markets if Trump pulls the US out of multilateral trade and security arrangements, from Nafta to Nato. |
| What happens when Trump insults a foreign leader, or orders a US warship to fire on an Iranian vessel, triggering a war? Or – God forbid – decides to use some of the nuclear arsenal to “take out” Isis? We can all forget about our retirement funds at that point; they’ll vanish in the mushroom cloud. It doesn’t help the market’s confidence that Trump’s team of economic and foreign policy advisers don’t seem to have extensive credentials or expertise. | What happens when Trump insults a foreign leader, or orders a US warship to fire on an Iranian vessel, triggering a war? Or – God forbid – decides to use some of the nuclear arsenal to “take out” Isis? We can all forget about our retirement funds at that point; they’ll vanish in the mushroom cloud. It doesn’t help the market’s confidence that Trump’s team of economic and foreign policy advisers don’t seem to have extensive credentials or expertise. |
| Clinton is more of a known quantity. Despite her increasingly populist rhetoric against the financial institutions, the apparent transcripts of speeches she gave to Goldman Sachs and other banks before casting her hat into the ring suggest that as Bernie Sanders and his supporters had insisted, she was actually much more supportive than she now makes herself out to be. | Clinton is more of a known quantity. Despite her increasingly populist rhetoric against the financial institutions, the apparent transcripts of speeches she gave to Goldman Sachs and other banks before casting her hat into the ring suggest that as Bernie Sanders and his supporters had insisted, she was actually much more supportive than she now makes herself out to be. |
| The speeches reveal a candidate who is pro-free trade and who suggested she would be amenable to maintaining the much-criticized “revolving door” between Wall Street and its regulators. “The people that know the industry better than anybody are the people who work in the industry,” she said, according to the transcripts. | The speeches reveal a candidate who is pro-free trade and who suggested she would be amenable to maintaining the much-criticized “revolving door” between Wall Street and its regulators. “The people that know the industry better than anybody are the people who work in the industry,” she said, according to the transcripts. |
| That’s the pragmatic Clinton of before the election, and it suggests that, if anything, her victory next month would at least be good news for those Americans with an interest in a stable economy and stable markets. | That’s the pragmatic Clinton of before the election, and it suggests that, if anything, her victory next month would at least be good news for those Americans with an interest in a stable economy and stable markets. |
| But if you’re hoping for a “Clinton rally”, don’t hold your breath. | But if you’re hoping for a “Clinton rally”, don’t hold your breath. |
| Especially in the wake of the first debate – and in light of the bombshell revelations about Trump’s taxes and open mic comments about groping women – the markets now have largely priced in a Clinton victory. | Especially in the wake of the first debate – and in light of the bombshell revelations about Trump’s taxes and open mic comments about groping women – the markets now have largely priced in a Clinton victory. |
| If Clinton wins, we won’t see big changes in economic policies – she is, more or less, familiar, which is something that markets love, because it gives them something that they adore: “transparency” or “visibility”. If traders and big institutional investors, like the mutual fund managers at Fidelity, can look forward and predict, more or less, what is going to happen (or if they think they can), they’ll be more comfortable with the valuations that they’re paying for stocks today. If there are too many wild cards, they’ll take their money off the table. | If Clinton wins, we won’t see big changes in economic policies – she is, more or less, familiar, which is something that markets love, because it gives them something that they adore: “transparency” or “visibility”. If traders and big institutional investors, like the mutual fund managers at Fidelity, can look forward and predict, more or less, what is going to happen (or if they think they can), they’ll be more comfortable with the valuations that they’re paying for stocks today. If there are too many wild cards, they’ll take their money off the table. |
| But a Clinton victory, heading toward the eighth anniversary of the start of the current bull market in stocks, wouldn’t give anyone any encouragement to think that this was the start of something dramatically positive either. Should she be elected, stock valuations would still be in nosebleed territory. Interest rates would still be too low, and would be heading upward, putting downward pressure on the prices of stocks and bonds simultaneously. | But a Clinton victory, heading toward the eighth anniversary of the start of the current bull market in stocks, wouldn’t give anyone any encouragement to think that this was the start of something dramatically positive either. Should she be elected, stock valuations would still be in nosebleed territory. Interest rates would still be too low, and would be heading upward, putting downward pressure on the prices of stocks and bonds simultaneously. |
| There’s a phenomenon known as the presidential election cycle theory. In brief, it argues that the first year following a presidential election is always bad for markets, regardless of who wins – Republican or Democrat. Then, stock markets do better in the second year following the election and best of all in the third year, before turning in a lackluster year in the fourth year. | There’s a phenomenon known as the presidential election cycle theory. In brief, it argues that the first year following a presidential election is always bad for markets, regardless of who wins – Republican or Democrat. Then, stock markets do better in the second year following the election and best of all in the third year, before turning in a lackluster year in the fourth year. |
| I suspect we’ll see a variant of that this year, if Clinton wins. We might experience a brief “pop” in the immediate aftermath of the election itself, in the form of a kind of relief rally. But once that is over, the grim work of unwinding a big asset bubble built up in the attempt to contain and resolve the financial crisis will have to start, beginning with the Fed raising interest rates. That is going to hurt the already sluggish economy, which has been struggling to turn in an average annual growth rate of 2.1% since the current expansion began. That’s the lowest of any growth period since 1949. | I suspect we’ll see a variant of that this year, if Clinton wins. We might experience a brief “pop” in the immediate aftermath of the election itself, in the form of a kind of relief rally. But once that is over, the grim work of unwinding a big asset bubble built up in the attempt to contain and resolve the financial crisis will have to start, beginning with the Fed raising interest rates. That is going to hurt the already sluggish economy, which has been struggling to turn in an average annual growth rate of 2.1% since the current expansion began. That’s the lowest of any growth period since 1949. |
| Those challenges will all remain in place in the unlikely event that either of the two third-party candidates triumphs on election day. They would be magnified by the fact that neither would have natural allies from their own party in Congress, making it infinitely more difficult to implement even basic economic policy. The predictability and stability factors that are an issue with Trump would exist with Gary Johnson or Jill Stein, albeit for different reasons. | Those challenges will all remain in place in the unlikely event that either of the two third-party candidates triumphs on election day. They would be magnified by the fact that neither would have natural allies from their own party in Congress, making it infinitely more difficult to implement even basic economic policy. The predictability and stability factors that are an issue with Trump would exist with Gary Johnson or Jill Stein, albeit for different reasons. |
| There are plenty of compelling reasons to cast a ballot on 8 November, heaven knows, without thinking about which result will be best for your investment portfolio. But if that’s the one that is going to which lever you pull or box you check, well, there’s no perfect solution, only a least worst option. | There are plenty of compelling reasons to cast a ballot on 8 November, heaven knows, without thinking about which result will be best for your investment portfolio. But if that’s the one that is going to which lever you pull or box you check, well, there’s no perfect solution, only a least worst option. |
| Many of the issues that have the potential to wreak havoc on stocks are out there on the horizon, like an ominous dark cloud. Our choice of president won’t banish them. It can only add to them. | Many of the issues that have the potential to wreak havoc on stocks are out there on the horizon, like an ominous dark cloud. Our choice of president won’t banish them. It can only add to them. |