We have been getting an increasing number of questions about what a Donald Trump victory in November’s presidential election might mean for markets. There are several reasons for that, including a closer race, the proximity to the first debate (less than a week away), and the media’s obsession with the unconventional election cycle and unconventional Republican candidate.
Another reason for the questions is that a potential Trump presidency brings so much uncertainty. He has not provided as much detail about his policies as Hillary Clinton (or previous candidates), some of his rhetoric is extreme and tough to model, and probabilities of his proposals actually happening vary widely. The makeup of Congress—also uncertain—is a key factor that sometimes receives less attention than it should amidst all of the political talking points.
Although Clinton remains the favorite according to most of the sources we follow, recent polls tell us not to ignore the possibility of a Trump victory. So let’s talk about some of the potential market implications.
Volatility. Markets do not like uncertainty, so from that perspective, stocks may fare better under a potential Clinton administration that would present some continuity and predictability. Every election is different and stocks are driven by other factors, but a look back at stock market performance ahead of the 1992 and 2000 elections, when either an incumbent lost (1992: George H.W. Bush versus Bill Clinton), or when no incumbent was running (2000: George W. Bush versus Al Gore), may be instructive. The maximum S&P 500 drawdowns between September and Election Day of those two years were 5.6% and 13.1%, respectively (see the figures below).
In hindsight, late 2000 was a poor investment environment (ahead of the 2001 recession and accounting scandals that followed the dot.com bust) so that big of a correction between now and Election Day seems extreme to us. Perhaps the 1992 experience is a better comparison, although that was earlier in an economic cycle and could be considered a better investment environment from that perspective (the next recession was nine years away).
Emerging markets. Trump’s tough rhetoric on trade relations with China and Mexico could have negative economic implications, although he has softened his stance in recent weeks. Weakness in the peso could put pressure on multinational revenue sourced in Mexico even if trade continues at current levels. A possible trade war with China could be negative for economic growth in China, a key driver of emerging markets demand, which could have ripple effects throughout the Asia-Pacific region.
Taxes. Trump will lower them while Clinton will raise them; tax cutting may be market friendly in the short term, but deficits may widen more and inflation may be higher longer term under Trump (both candidates want more infrastructure spending). Trump has expressed support for a lower tax rate on repatriated earnings overseas (also supported by many Democrats), which could generate tax revenue and stimulate economic growth
Bond yields. Trump’s potential for more deficit spending may put upward pressure on inflation and bond yields. However, if the market’s price in slower growth, the potential upward pressure on yield may be mitigated.
Healthcare. Trump has stated his desire to repeal the Affordable Care Act (ACA), which could negatively impact certain parts of the sector such as hospitals (both candidates want lower drug prices). Ironically, the health insurance companies losing money on the program that have pulled out of exchanges may be positively impacted by repeal. While Trump has been a proponent of drug re-importation, which would put pressure on drug prices, we view Clinton as more negative for drug prices, suggesting that these industries may get a bump in the event of a Trump victory.
Financials. Trump plans to roll back financial regulations and is likely to be friendlier to the financial sector than Clinton, who would likely continue the tough regulatory environment established since the financial crisis.
For now, based on our assessment of the macroeconomic environment, we would not be particularly worried about the stock market under either candidate. Volatility is likely to pick up after being so low for so long; however, stocks historically finish election years pretty strong regardless of the political dynamics. With the first presidential debate coming up next week and still more than a month to go before we head to the polls, look for much more from us on the election and markets in the weeks ahead.
Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.
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Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
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The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
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