Marketwatch Story of Interest

November 20, 2016

The market’s view on Trump pre and post-election; a logical reassessment?

While watching CNBC post-election, the pundits on Fast Money were guiding the public on where to invest in a “Trump World.” The consensus was not “outside of America,” which is somewhat surprising considering the sky was falling as votes were being tallied on November 9th, and the over-animated real-estate billionaire was assuming the most powerful position on earth. CNBC’s recommendations sparked questions about the market consensus on Mr. Trump before the election versus after, and the question are: could the markets have better priced a Trump victory, and is their bullish reassessment correct?

A few high level reasons why the markets had a bearish outlook on a Trump presidency:

  • No precedent for a Trump-like presidency which possesses uncertainty due to Trump’s lack of experience in public office, perceived lack of temperament and judgment. Markets cannot properly forecast results, causing volatility. A Clinton presidency however, would largely resemble Obama’s and she has a long history in public office where one can draw precedent from.
  • Fiscal policies such as tax cuts and infrastructure spending would greatly increase USA’s debt.
  • Foreign policies related to re-working/canceling trade agreements (NAFTA), aggressive stance on China and Mexico (tariffs and wall), participating in NATO, etc. would hamper the positive effects of globalization, bring back manufacturing jobs that are better preformed elsewhere, start trade wars and agitate global relations.

Below is a chart of E-Mini S&P 500 futures (expiring Dec. 16) to help illustrate the markets being strictly bearish on Trump (i.e. bullish on Clinton) pre-election.

Time period ‘A’ starts on October 18, 2016; FBI Director James Comey sent a letter to congress that new e-mails relating to Clinton’s e-mail scandal were discovered in an unrelated case. The FBI’s recommendation to not prosecute Clinton could potentially change. As momentum was taken out of Clinton’s campaign by this event, her chances of winning the election decreased and the markets declined in response until the resolution.

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Time period ‘B’ starts on November 6, 2016 (resolution); the Sunday before voting when Director Comey released a statement that the FBI would not change its recommendation regarding Clinton’s e-mails. Markets began their rally supported by polls showing an overwhelming likelihood of Clinton winning the election.

The beginning of time period ‘C’ shows the final confirmation that markets were bearish on Trump. 20:00 o’clock on September 8, 2016, posted the first bearish candle that marked the beginning of a ~$120 drop in the $ES to $2,028.5. At midnight, a Trump victory was all but certain and a massive downswing had occurred.

So what occurred at midnight on November 9, 2016, that began a rally to all-time highs? This questions the legitimacy of market expectations, and certainly of poll forecasting. How can the markets be so confident in an estimated outcome (Clinton winning) and that outcome’s effects (better condition for the markets than Trump winning), only to flip sides so easily when the exact opposite happens?

Here is a high level list of reasons the markets have rallied since Trump became president-elect:

  • Markets see a medium term boom in the American economy due to Trumps expansionary fiscal policies: cut corporate taxes from 35% to 15%, implement tax-holiday for repatriated profits in offshore tax havens and spend $1 trillion to upgrade USA’s battered infrastructure.
  • Bond yields have increased as Trump’s fiscal expansion requires borrowing for spending, thus increasing USA’s budget deficit. Higher long term bond yields signal economic growth and inflation increasing to a more desirable level. The higher inflation will combat fears of falling consumer prices as central banks in western nations are increasingly limited in their ability to increase inflation with monetary policy.
  • Rally in banks is due to expected reduction in regulation (alleviating compliance costs) and increased interest rates which bolster revenue and margins.
  • Since his victory, Trump has been as “president-like” as one could hope for. In the few speeches he has given he has spoken in a quiet/tempered tone of voice, he has largely kept away from Twitter, he has eased previously erratic promises1 and not made any new ones.

Market participants took the expected outcome (Clinton winning) and equated it to a market increase without critically analyzing or more accurately pricing in a Trump victory and the effects that would have on the markets. When Trump won, USA exhibited its “perma-bull” mentality and found reasons a Trump victory would be positive and dismissed their previous logic and warnings from esteemed economists2. So what could an average investor and even above average participants have looked at to at least put more weight on Trump winning and conclude that his win would not be strictly a bearish outcome?

  • Draw closer parallels between USA’s 2016 presidential election and the Brexit vote: the Brexit vote was ultimately a decision of rebellion and outcry by the public against the incumbent wealthy, open immigration, lost jobs, suffering middle class and local economy being taken advantage of by multi-national agreements (EU). The winning vote was decided more by passion and emotion versus policy, facts and figures, as evidenced by the most Googled question after Brexit being “what is the EU?” All the same factors were present in the presidential campaign as Trump rallied “the forgotten middle class” by painting a grim image of USA and giving erratic anti-establishment speeches and promises that resonated with the people.
  • It is hard for mainstream polls to account for hidden votes in an election with the above characteristics; votes from individuals who typically do not vote but are now motivated to vote, votes from people publicly supporting Hillary but secretly voting Trump and voters who supported Democratic candidate Sanders actually voting for Trump as his anti-establishment goals are more in line with Sanders’ than Hillary’s policies. Therefore, a sensitivity buffer should be used in polls due to the unique nature of the election.

By digging deeper than the mainstream media’s polls and resounding Clinton expectations, a participant could have at least increased expectations of a Trump victory. Subsequently, one could extrapolate his policies and their effects as the main policies that would have an immediate effect on markets were known (fiscal expansion, trade balance, deregulation) and realize that it’s not simply bearish. Ultimately, reducing the volatility that has been seen in the markets since June and better pricing a Trump victory.

Whether the market’s reassessment on Trump is correct or not remains to be seen, the only thing certain about the full effects of a Trump presidency is that they are still uncertain.

 

1-Fence will suffice in some areas vs entire wall across Mexican border, repeal only parts of Obamacare, will continue to support NATO.

2-The Wall Street Journal released a letter which gives a variety of reasons Trump is a “dangerous, destructive choice for the country [USA].” This letter was signed and endorsed by 370 top economists (8 of which are Nobel Prize Winners).

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