A hot race: What would a Trump victory mean for markets?
A Trump presidency is likely to be initially negative for shares as investors would fear his policies on trade.
A hot race: 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.
What’s the economic impact of a Trump victory?
Many of Trump’s economic policies could provide a boost to the US economy. The combination of big tax cuts and increased defence and infrastructure spending will provide an initial fiscal stimulus and, with reduced regulation, a bit of a supply side boost.
Longer term, the budget deficit will likely blow out and protectionist tariff hikes would likely set off a trade war along with much higher consumer prices and immigration cut backs would boost costs. This could ultimately mean higher inflation, bond yields and interest rates and a hit to growth. There may also be negative geopolitical and social consequences (tensions with US allies, reduced inflows into US treasuries in return, social unrest and a more divided America) if Trump follows through with his protectionist trade policies. Australia being more dependent on trade than the US would be particularly adversely affected if Trump were to set off a global trade war.
In saying this, politicians are well known for dropping more extreme aspects of their policies once they attain power as economic and political realities set in. In the case of Trump, it’s partly a case of whether we end up with Trump the pragmatist (who backs down on some of his extreme measures such as those around protectionism) or Trump the populist (who sticks to his policies once president) and whether Congress limits him or not.
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.
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.
About the author
Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.