By Shane Oliver, Chief Economist and Head of Investment Strategy

In this video, Shane Oliver, Head of Investment Strategy and Chief Economist, provides a macroeconomic update and discusses some of the key issues of the US Presidential election.


News of the FBI’s renewed examination of Clinton’s emails means the US Presidential election outcome is back to being close. Putting aside the low risk of no candidate getting a 270 vote majority in the Electoral College (which could see Trump voted as president by the House of Representatives) there are three scenarios worth considering:

  • Trump president, Republicans retain the House and Senate (45% probability)
  • Clinton president, Republicans retain the House and probably the Senate (50% probability)
  • Clinton president, Democrat majorities in the House and Senate (5% probability)

A Clinton presidency would most likely see a continued divided government. This would mean that her more left wing policies (more regulation, tax hikes) would not be passed and it would just be ‘more of the same’.

By contrast a Trump presidency will likely see Republican majorities retained in both the House and Senate. This could provide an opportunity for significant tax reform and reduced regulation, but conservative Congressional Republicans would have to be relied upon to prevent a budget deficit blow out and aggressive protectionism.

Outlook for markets

The last few weeks – with US shares tending to sell off when developments favoured Trump and rally when developments favoured Clinton - suggest investors favour a Clinton victory as long as it’s not a clean sweep. A Trump victory would likely trigger an initial bout of ‘risk off’ with shares down by 5-10% or so (both in the US and globally) and safe havens like bonds and the US dollar rallying as investors fret particularly about his protectionist trade policies triggering a global trade war.

Australian shares would be particularly vulnerable to this given our high trade exposure. While the Fed would be less likely to hike in December if Trump wins, the Australian dollar would likely still suffer from the threat to trade and the initial ’risk-off’ environment. A Trump victory to the extent that it leads to falls in investment markets and worries about a global trade war may also increase the chance of another rate cut in Australia.

Beyond the initial reaction, share markets could then settle down and get a boost with bond yields and the US dollar rising to the extent that his stimulatory economic policies look like being supported by Congress and lead to a higher US budget deficit and tighter monetary policy, but much would ultimately depend on whether we get Trump the pragmatist or Trump the populist. Congress along with economic and political reality can probably be relied on to take some of the edge off Trump’s policies, but this would take time.

A Clinton/Democrat clean sweep of the Presidency and Congress would likely also trigger a bout of nervousness in US shares as it would be easier for Clinton to implement less business-friendly tax and regulatory policies that would weigh on US health, energy and financial stocks. This would likely be more focused on US shares though with less of an impact on global or Australian shares.

It’s worth noting that around the Brexit vote, there was much concern a ‘Yes’ vote would be a disaster for shares and the global economy. Reflecting on this event, there was an initial knee jerk sell off but after a few days global markets moved on to focus on other things. Therefore, there could be a danger in making too much of the US election.

Final thoughts

Perhaps the best that can be said of the US election is that it will soon be over. While some of Trump’s economic policies could provide a fiscal and supply side stimulus to the US economy, a Trump victory is likely to be initially negative for shares and favour safe havens like bonds and the US dollar as investors would fear his policies on trade in particular.

This would be negative for Australian and Asian shares and for the growth sensitive Australian dollar. The smoothest outcome for investors from next Tuesday’s US election would be a Clinton victory but with the Republicans continuing to control the House of Representatives.

Shane Oliver

Dr Shane Oliver has extensive experience analysing economic and investment cycles and how current positioning affects the return potential for asset classes such as shares, bonds, property and infrastructure. Shane is a regular media commentator, providing economic forecasts and analysis of key variables and issues that affect all asset markets.

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