BY EMILY LEWIS

The global economic outlook for the months that lie ahead are undoubtedly threatened by the political uncertainty of the upcoming U.S. presidential election. Whomever the next president may be, the successful candidate on 8 November 2016 will have their own plans and priorities for U.S. economic policy, and in turn the global economy. Donald John Trump and Hillary Diane Rodham Clinton, the front runners in an unpredictable and controversial race for the Oval Office, the next leader of the free world.  A problem that occurs during times of political economic upheaval is that markets are not always equipped to cope with the impact. As the domestic political war is waged between arguably the two most unpopular candidates in US history, global markets have been reacting as a result. Movement within international markets during the first television debate on 26th September confirmed the significant global impact of this election, with the S&P and the Nasdaq both dropping by 0.8% by the time the New York stock exchange had closed. With the largest economy in the world, $19 trillion dollars debt and a nation divided, a Trump or Clinton victory could mean very different outcomes for global markets.

Hillary Clinton: Corrupt Tool of the Establishment?:

With a political career spanning 35 years, Hillary Clinton has a political reputation that has seen her become unpopular with many. She lacks trust from the majority of the electorate, and her dealings with alleged highly classified information using private emails during her tenure as Secretary of State only served to cement this. However, despite the controversial popularity of the opposition’s nominee, Clinton’s lack of popularity, a trait she shares with Trump, makes the chances of her becoming the next US President less clear-cut – a US election clearly diverging from the generic norms of prior election cycles.

Up to this point, markets have been pricing in line with a Clinton win. Key observations in predicting the effects of a Clinton presidency on financial markets can be obtained through analysis of market movements at times where Clinton victory seemed likely. During the first television debate on 26th September, it was widely believed Clinton won the debate with her well thought-out and prepared moves displaying her experience in politics. In a study conducted by Wolfers and Zitzewitz on market movement within this debate, they saw that the December 2016 S&P 500 future also rose within the hours around the event in relation to Clinton’s perceived election chances[1]. Despite the main U.S. financial markets being closed during this time, this would suggest that value of stocks are expected to rise with Clinton as president. This is just one of many examples that show a more positive economic outlook under Clinton.  A more recent example is the October jobs report released on 4th November, in which unemployment has fallen below 5% and wages are up 2.8% over the last 12 months[2]. This gives weight to a positive economic future under Clinton, who is expected to continue Obama’s economic policies if elected[3].

The predictions for the economy under a Clinton presidency are a lot more stable in comparison to under Trump. In some ways this is not surprising, as Clinton would act as more of a continuation of the current system. Clinton’s policies are more defined and lack Trump’s element of surprise. However, Morgan Stanley strategists claim that a clean sweep for Hillary and the Democrats would “represent one of the toughest election outcomes for banks” and open the door to tougher scrutiny from the regulator[4]. The possibility of stricter ruling and changes in tax policy could hurt large American corporations such as Goldman Sachs Group Inc. and JPMorgan Chase & Co. Therefore, although the economy may remain more certain, under Clinton it could have negative repercussions on banks and in-turn increase their operating costs.

Donald Trump: Weapon against the Establishment?:

Comparatively, Donald Trump has a noticeable shortage of political experience.  He is far from ‘politically correct’, and he has also made a record amount of false statements throughout his campaign. He has roused hatred from many with his views on illegal immigration, off-shoring of American jobs, the U.S. national debt and Islamic terrorism. It has been suggested that markets under a Trump presidency could fare worse than if the electorate vote Clinton. Currently Trump is behind in the polls with FiveThirtyEight’s editor Nate Silver currently giving Clinton a 66.2% chance of winning compared to Trump’s 33.8%[5]. However, with the gap once again closing, following the, now discounted[6], FBI recently reopening their investigation into Clinton’s emails, the fear of a Trump victory has grown significantly. As opinion polls started to reflect a narrowing race, the US dollar and shares fell, with investors flocking to the safe haven that is gold.

Donald Trump has as of yet come up with very few specific details around his economic plans, making it increasingly hard to assess the effect his presidency would have on the global economy.  Even in the case of the Mexican peso there is no solid evidence that the currency would lose value if Trump resided in the White House. However, a Moody’s Analytics report has used the information available to speculate that a “lengthy recession” would be sparked if Donald Trump emerged as president on 8th November[7], a statement that has been echoed by many a mainstream economist and analyst[8]. The same report claims that a Trump presidency points in the direction of a US economy that is more isolated and that would thus diminish the prospects of the nation’s growth[9]. It also predicted that there would be average annual losses of 1.2 percent on the Standard & Poor’s 500 index[10].

Financial markets, at least for now, seem to be less sensitive to ‘Trump Risk’ than they were to ‘Brexit Risk’. Both significant political events with widespread impacts, some argue that the risk of Trump becoming president is a lot more detrimental than Britain leaving the EU. However, this may be mostly due to financial markets not considering it to be a likely scenario. It seems that investors are learning from the complacency adopted before the Brexit vote and are now naturally trying to protect themselves against the possible outcome of a Trump win.

With Trump gaining popularity, we have seen global markets start to take cautious measures. Analysts at Rabobank described investors as succumbing to a risk-off pattern to protect themselves in the case of a Trump victory[11]. This was reflected through safe havens such as bonds, gold, the Swiss franc and Japanese yen all rising on 2nd November in reaction to Trump’s presidency chances [12]. This is understandable due to Trump’s Nationalist and isolative policies could be highly dangerous for a global economy that is focused on integration. Trump has the potential to cause a trade war, damage business confidence and, ultimately, destroy an already fragile US economy.

In the words of Harvard Professor and former US Treasury Secretary Charles W Eliot – ‘Markets are discounting the possibility of a Trump presidency. Let us all pray they are right.’ [13]

 

[1] https://www.brookings.edu/wp-content/uploads/2016/10/what-do-financial-markets-think-of-the-2016-election_102016_wolferszitzewitz.pdf

[2] http://www.upi.com/Top_News/US/2016/11/04/Last-labor-report-punctuates-historic-job-growth-may-propel-Clinton-across-finish-line/8561478302857/?spt=slh&or=6

[3] http://www.upi.com/Top_News/US/2016/11/04/Last-labor-report-punctuates-historic-job-growth-may-propel-Clinton-across-finish-line/8561478302857/?spt=slh&or=6

[4] http://www.bloomberg.com/news/articles/2016-10-30/u-s-election-guide-to-markets-what-to-watch-as-results-come-in

[5] http://fivethirtyeight.com/?ex_cid=2016-forecast

[6] https://www.theguardian.com/us-news/2016/nov/06/fbi-director-hillary-clinton-email-investigation-criminal-james-comey

[7] https://www.economy.com/mark-zandi/documents/2016-06-17-Trumps-Economic-Policies.pdf

[8] http://www.cnbc.com/2016/06/21/trumps-policies-would-cause-lengthy-recession-moodys.html

[9] https://www.economy.com/mark-zandi/documents/2016-06-17-Trumps-Economic-Policies.pdf

[10] http://www.usnews.com/news/articles/2016-06-20/study-trump-presidency-could-spark-lengthy-recession

[11] http://uk.reuters.com/article/global-markets-idUKL8N1D32BZ

[12] http://uk.reuters.com/article/global-markets-idUKL8N1D32BZ

[13] https://www.ft.com/content/84ebe1b2-29a8-11e6-8ba3-cdd781d02d89