In less than a month, we will know if Donald Trump’s push to reside in the White House has been successful. Many would see Trump’s divisive and demeaning comments about certain groups of people, short fuse and erratic nature as rendering him as unqualified to be US president. This note looks at the main issues and implications for investment markets.
How did it come to this?
This presidential election is very much a contest between an establishment candidate (Clinton) and a populist outsider (Trump). The success of Trump has its origin in the same forces that drove the Brexit vote – a backlash against stagnant median incomes, rising inequality, slow post GFC economic growth, a reduced ability to take on debt to boost living standards, rising immigration and the loss of jobs overseas that the political establishment is seen as having overseen.
As is often the case, aggrieved citizens can become attracted to populist politicians offering simple solutions. We have seen this trend gain momentum over most of 2016. Trump’s support base is dominated by white non-college educated males who are aggrieved at the loss of manufacturing jobs in the US, feel they’ve been left behind by the progress of recent decades and don’t like becoming an ever smaller group in their own country.
Economic impact
First looking at Trump, many of his economic policies could actually provide a boost to the US economy. The Reaganesque combination of big tax cuts & increased defence and infrastructure spending will provide an initial fiscal stimulus and with reduced regulation. Longer term though 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 slow labour force growth and boost costs. All of which could mean higher inflation, interest rates and a $US and a hit to growth. There may also be negative geopolitical and social consequences (tensions with US allies that have to pay more, reduced inflows into US treasuries in return, a more divided America) if Trump follows through with policies on these fronts.
Clinton’s policies would likely also provide a short term stimulus but higher marginal tax rates and more regulation may offset the short term boost. At least there is no risk of a trade war.
But of course this assumes that the winner is willing and able to implement all of their “policies”.
The election and the share market
Firstly, some facts. The election year, or Year 4, in the 4 year presidential cycle is normally an okay year for US shares with an average total return for such years since 1927 of 11.2%.
Source: Bloomberg, AMP Capital
At present the US share market does not appear to have focused too much on the US election. If betting markets are any guide investors are assuming roughly a two thirds probability that Clinton will win and I suspect beyond that the Democrats won’t win control of Congress. But as we saw with Brexit betting markets have not been so accurate lately. So if Clinton wins and Democrats gain control of Congress or the more realistic risk that Trump wins with Republicans continuing to dominate Congress then it will come as a shock to investors and could cause turbulence in markets at least initially. For this reason the volatility we have seen in share markets lately could continue in the weeks ahead if Trump continues to rise in the polls as investors fret about his trade and foreign policies in particular.
Beyond the initial nervousness around a Trump victory, share markets could then settle down & get a boost to the extent that his Reaganesque economic policies look like being supported by Congress, but much would ultimately depend on where America goes on trade and foreign policy. I suspect Congress can be relied on to ensure that Trump does not go off the rails in these areas and economic and political reality would force him to the centre but this would take time.
A “more of the same” victory would likely ensure a smoother ride for investment markets (and be a preferable outcome for the Australian economy given its high trade exposure). Interestingly since the early 1970s the best outcome for US shares has been a Democrat president with a Republican controlled House of Representatives.
Source: Shane Oliver, Chief Economist AMP Capital
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