As a federal financial regulator for many years, my mantra was: Don’t do anything to move markets and stay away from commenting upon politics. Such was the case when I knew confidential details about investigations and even amid a prevalent view about markets. Adding my likeminded voice to the echo chamber seemed unfitting and inappropriate. Being out of government, I still try to be cautious.
This view isn’t simply scuttlebutt. Based upon research contained in a new Brookings Institution report “…financial markets expect a generally healthier domestic and international economy under a President Clinton than under a President Trump.” The Tax Policy Center projected the economic impact of each particular tax proposal over the next decade and found Clinton’s better for growth than Trump’s. Similarly, the non-partisan Committee for a Responsible Federal Budget determined that Clinton would generate a better Gross Domestic Product than Trump (2.3 percent versus 1.7 percent, respectively).
Here’s how I break it down: It’s given that those integral to financial markets don’t need certainty. For traders, there wouldn’t be any trading at all if the facts were simply self-evident. However, the financial sector does want to know the basic rules of the game: Are wild cards allowed? If so, how many in the deck? What constitutes a winning hand? With Trump, evidenced by his frequent wild cards and reinterpretation of events, policy positions and even his own statements, if he were elected those in the financial sector (generally speaking) would decrease capital expenditures with a resultant shrinkage in economic activity. For traders, they would simply hold cards close to their vests and take little, if any, risks. Many may merely fold. Consequently, trading liquidity would be reduced, spreads would widen and price discovery would be compromised with a high prospect of very volatile market movements.
Clinton, on the other hand, is a known quantity. She’s straightforward in what she’d try to do as president. She wants to cut taxes for the middle class, raise the minimum wage and invest in infrastructure and education. In the second debate, she was clear about continuing to honor international commitments to North Atlantic Treaty Organization nations and others with regard to existing trade agreements. People may not agree with all the positons—and many in the financial sector don’t—but Clinton’s stances are clearly identified and available on her website where more than 40 issues are presented in demonstrative detail with supplementary fact sheets.
The past two Republican presidential nominees (Governor Romney and Senator McCain) were both known quantities with identifiable policy postures. Had either been elected, markets would not have reacted negatively. Nobody really thought our economy would have suffered due to their election. In fact, the Brookings report notes that stock market rises most often surround a Republican presidential victory, not a Democrat.
In contrast to Clinton’s known policy stances, for Trump … well, we don’t know so much. We understand his desire to build a southern border wall, ban certain Muslims from entering the country, repeal and replace Obamacare, support for infrastructure investments and the Second Amendment (gun rights) and changes to the tax code. His positons, nonetheless, are only and inch deep and not very wide. His campaign website “Issues” page is a scant 18 nonspecific subject matter videos. Little more exists.
Even without knowing Trump’s detailed policy positions, those involved with the financial sector might have sufficient certainty (and therefore confidence) about the future if they believed he had a steady and stable disposition. Alas, that too is not the circumstance. His touchy temperament — as revealed repeatedly — is callous and uncool under pressure. While he has displayed flashes of unflappability, there’s an observable shelf life to that (about 20-30 minutes) at which point he reverts to being ruffled and rough, perturbed and even petty.
For market participants who would choose to remain in the game under a Trump presidency, they would likely look for safe haven investments. However, these would be few and far between. Much money would be waiting on the sidelines endeavoring to determine what may or may not happen. At a time when we should hope for more investment to continue our economic growth, that’s exactly what we don’t need.
Finally, we’ve heard about the comparisons of Trump’s candidacy to other to rebellious movements, namely Brexit. The appraisal is apt and ominous. While many prognosticators feared a worse impact upon the United Kingdom’s (UK) economy and despite some recent positive economic news, many still fear a recession. The British pound has become the world’s worst-performing currency, hitting a 31-year low and losing nearly a fifth in value versus the U.S. dollar. UK stocks have seen a volatile few months. Given that the European Union is the UK’s largest trading partner, there’s ample ambiguity about the future of UK exports. Plus, there’s continued political uncertainty. That’s not so good for businesses, for stocks, for investors nor for the UK economy.
Unfortunately, what do not know about how Trump would perform as president, combined with what little we do know about a few of his policy positions, the recent UK experience, and the understanding about how the financial sector and markets react all send a forthright forecast. Were Trump to be elected, there’s a poor prognosis for US markets and our economy.