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Clinton, Trump & the Markets

Tuesday, May 24, 2016

What does the US election race mean for market volatility? Comment from Sushil Wadhwani, CTA investment manager for GAM and CEO of Wadhwani Asset Management.

Election uncertainty comes in two forms: who will win and what they will do when in power. The two may become intertwined if a close race leads the candidates to shift their policy stances.

The conventional wisdom is that Donald Trump won’t win against Hillary Clinton. However, were that to change, the scope for volatility is considerable. Take for example his comments about replacing Janet Yellen as Fed Chair. If the opinion polls shift to suggest that he might have a good chance of winning, then similar statements could create a lot of market volatility. Markets are assuming that Clinton will end up president and nothing much will change; essentially we will have a Democrat president who struggles to get much done. Anything that suggests otherwise will certainly affect markets.

Much of the historical work on elections and markets suggests that it’s the party that matters. However, this time is different. Trump is an unusual candidate as he is not a typical Republican. We might need to rewrite the rules this time around.

Monetary policy has been of primary importance for markets in the post-financial-crisis recovery years. Were a new president to change the current Fed setup – whether personnel or its “rules of the game” – that is probably what would matter most for markets. In addition, the fiscal stance might matter more than it has in recent years – especially if Trump were to push for a Reagan-style paring back of the role of the state, say via unfunded tax cuts. That could easily impact the economy’s cyclical and structural performance. It could raise questions about the sustainability of public finances too, even if it engendered short-term economic stimulus. Of course, the policy mix would then matter a lot too – for example to the US dollar.

Clinton is seen as a “safe pair of hands” – well known and more likely to tinker on the policy front than attempt wholesale reforms. Financial markets probably wouldn't move a lot if she won, at most there could be a bit of a relief rally. Trump, by contrast, is seen as a much bigger risk. Many are worried that he will rock the boat, say with stronger suggestions that he will replace Yellen, and also on the trade front, for example new trade restrictions with China. Anything that raises prospects of Chinese currency destabilisation would run the risk of a global recession and have huge impacts on financial markets.

It all depends a lot on what policies the new president manages to deliver. If he/she does not have the support of Congress, it can be a long haul getting anything changed. But a radical president with the support of Congress, could have far-reaching effects very quickly. Of course, someone with a proven track-record, and experience in government, is less likely to ruffle the waters than a 'new boy'.

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