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Market Impact of a Trump Presidential Win

Summary:
The probability of Republican Donald Trump winning the U.S. presidential election on November 8 seems remote at the moment—economists on Credit Suisse’s Global Markets team put it at less than 10 percent. So if it did happen, it would come as a major surprise for financial markets. The last time that kind of seemingly low-likelihood event came to pass—during last June’s Brexit vote—most investors were caught wrong-footed. So how might they best prepare for something as unexpected as President Donald Trump?   Credit Suisse’s U.S. equities strategists note that volatility would likely swing higher if Trump wins—or even if polls swing in his direction ahead of the election. Of course, that kind of thing usually happens when the White House changes hands from one political party to another. The CBOE Volatility Index (VIX) shot up the last three times it happened—in September and October of 1992, 2000, and 2008. In 1992, the VIX spiked to 21 in early October, and the S&P 500 fell 5.3 percent from a September peak to an October trough. The equities strategists believe better Trump polling data could send the volatility index up between 20 and 30 from 13 on October 4.   Because Trump’s campaign has been light on policy details, his presidency would introduce significant uncertainty to financial markets.

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Market Impact of a Trump Presidential Win

The probability of Republican Donald Trump winning the U.S. presidential election on November 8 seems remote at the moment—economists on Credit Suisse’s Global Markets team put it at less than 10 percent. So if it did happen, it would come as a major surprise for financial markets. The last time that kind of seemingly low-likelihood event came to pass—during last June’s Brexit vote—most investors were caught wrong-footed. So how might they best prepare for something as unexpected as President Donald Trump?

 

Credit Suisse’s U.S. equities strategists note that volatility would likely swing higher if Trump wins—or even if polls swing in his direction ahead of the election. Of course, that kind of thing usually happens when the White House changes hands from one political party to another. The CBOE Volatility Index (VIX) shot up the last three times it happened—in September and October of 1992, 2000, and 2008. In 1992, the VIX spiked to 21 in early October, and the S&P 500 fell 5.3 percent from a September peak to an October trough. The equities strategists believe better Trump polling data could send the volatility index up between 20 and 30 from 13 on October 4.

 

Because Trump’s campaign has been light on policy details, his presidency would introduce significant uncertainty to financial markets. To better understand how industry-focused investors are assessing the potential impact, Credit Suisse’s equity strategists tracked which sectors have been moving in tandem with each candidate’s poll numbers. Healthcare and financial stocks, particularly banks and insurance companies, have been rising and falling with Trump’s fate in the polls, which suggests that investors believe the Republican candidate will take a more hands-off approach to regulation. Likewise, consumer discretionary and industrial stocks have been following Democrat Hillary Clinton’s polling trends, particularly in those industries that generate a relatively high proportion of their revenues from overseas, including capital goods, transportation, autos, and consumer durables and apparel. Credit Suisse suspects investors in companies with significant international sales are concerned about Trump’s negative views toward global trade.

 

There are some sectors, including healthcare and education, where the potential effects of a Trump or Clinton victory are more nuanced. Analysts who cover acute care hospitals and Medicaid managed-care companies believe Clinton would be better for their stocks, partly because she supports the Affordable Care Act, which relieved acute care hospitals by expanding insurance coverage and Medicaid managed-care companies by extending the reach of the government-funded insurance program for low-income people. Clinton also wants to expand Medicaid even further and provide government-run insurance plans—another potential boon. Trump, on the other hand, might benefit diversified managed care health companies, which have been hurt by Obamacare. While it’s unlikely that Trump could repeal the law, despite his promises to do so, he might use executive orders to soften some of its provisions. Clinton has also promised to limit out-of-pocket costs for consumers, which would shift more costs to insurance companies, while Trump has instead vowed to strengthen health savings accounts, which would help them.

 

Most education-related companies would benefit from Clinton’s proposed college tuition subsidies and desire to expand early education. That said, consumer finance companies, particularly companies that lend to college students, and for-profit colleges have come under intense scrutiny under President Obama, and would likely continue to do so under Clinton—but would be less likely to do so under Trump.

 

For energy companies—including exploration and production companies, oilfield services companies, refiners, and master limited partnerships—the outlook is more straightforward and more in favor of Trump. His “America First” energy plan calls for pulling out all the stops to achieve U.S. energy independence, including slashing regulation.

 

In just a few sectors, the election of either Clinton or Trump doesn’t seem to matter much. Both Clinton and Trump are seen as positive for infrastructure and defense stocks, while both are seen as negative for mass merchants and off-price retail, given Clinton’s plan to raise the federal minimum wage to $12 and Trump’s anti-trade stance.

 

Elsewhere in the capital markets, Credit Suisse’s rates strategists say the term premium on 10-year Treasury notes could widen by between 30 and 40 basis points in the wake of a Trump win, as investors anticipate an increase in the supply of long-term government bonds. Trump’s proposed tax cuts and infrastructure spending would expand the U.S. deficit significantly, necessitating additional bond issuance. The Bank’s rates strategists also believe the yield curve would steepen immediately after the election.

 

Finally, the foreign exchange analysts on Credit Suisse’s Global Markets team note that a Trump presidency would probably cause the U.S. dollar to weaken against other safe-haven currencies, including the Japanese yen, Swiss franc, and euro, but rise against emerging-market currencies, which would likely get swept up in a broader “risk-off” shift. The Mexican peso and Canadian dollar are the currencies most likely to experience a direct hit, however, given Trump’s comments about pulling the U.S. out of the North American Free Trade Agreement.

 

Photo courtesy of AP Photo/ Evan Vucci

The post Market Impact of a Trump Presidential Win appeared first on The Financialist.

Ashley Kindergan
Ashley is an editor and writer at The Financialist. Previously, she worked as a national correspondent at The Daily, the first publication created exclusively for tablet devices, covering everything from municipal bonds to prisons. Before that, she spent five years reporting for daily newspapers in New Jersey.

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