A victory for Donald Trump on November 8 would deliver a sharp blow to stocks around the world and trigger an upsurge in volatility, in contrast to the market impact of previous Republican successes, according to academic research.
A study published on the Brookings think-tank’s website suggests a triumph for Mr Trump would lower the value of shares in the US, UK and Asia by between 10-15 per cent, reduce the price of oil by $4 dollars a barrel, and trigger a 25 per cent drop in the Mexican peso.
That would be a change from previous US elections dating back to the 19th century when equity markets tended to rise in the immediate aftermath of Republican victories and drop on the news of Democratic election wins, according to past studies. Markets have mostly performed better over the course of Democratic presidents’ terms.
The new research into Mr Trump’s market impact comes from Justin Wolfers, a professor at the University of Michigan, and Eric Zitzewitz of Dartmouth College.
The study comes despite pledges by Mr Trump to slash taxes and regulation and deliver policies that drive US economic growth up to 4 per cent or more, which if fulfilled should in theory be a boost for corporate earnings around the world.
Markets have largely ignored the US election for most of the year, but have started to twitch as it looms nearer. The Mexican peso has emerged as a popular market barometer for Mr Trump’s electoral outlook, given the Republican candidate’s vow to eject millions of undocumented immigrants and erect a wall on the Mexican border.
When Mr Trump’s poll numbers improved around May the peso came under pressure, but more recently it has been recovering as Democratic candidate Hillary Clinton’s chances have brightened. Some investors have also recommended playing the Russian rouble as a “Trump trade”, on the view that the Republican candidate is more likely to lift western sanctions on Moscow.
On the other hand, pharmaceutical stocks have been dragged down as Mrs Clinton’s chances of winning the presidency have strengthened, as the Democrat has periodically railed against drug price gouging.
The study is based in part on the market movements that occurred around a specific event during the campaign — namely the first presidential debate, which took place on September 26 and was deemed in opinion polls to have represented a victory for Mrs Clinton. The academics also looked at a second event which delivered a fillip to Mrs Clinton, namely the release of a tape from 2005 in which Mr Trump boasted about groping women.
The findings showed that during the first debate, the December 2016 S&P 500 index future rose in lockstep with Mrs Clinton’s election chances as measured in prediction markets, which suggested that investors expected stocks to be more valuable if Mrs Clinton wins. The academics focused on the first debate because they argue it delivered a “sharp and clearly exogenous shock to the probability of a Clinton versus Trump presidency,” which happened during a short evening window in which stocks otherwise barely moved.
The broader implications derived from that event are that market participants believe the S&P 500 would be worth 12 per cent more under a president Clinton, the researchers found. Market movements also pointed to greater uncertainty about the implications of a Trump presidency and therefore higher volatility. Strikingly, movements overseas suggested the US election is expected to have “significant global implications,” the researchers found.
“All told, these movements suggest that financial markets expect a generally healthier domestic and international economy under a president Clinton than a president Trump.”
The acrimony of the US presidential election — and the Republican presidential candidate in particular — has caused concerns among international investors.
One senior US investment firm executive on a visit to Japan said that normally phlegmatic institutional investors such as pension funds and insurers all asked about the impact of a president Trump. It was the first time in years of visiting Japan that his clients had expressed concerns about US presidential politics, the executive said.
Strategists at Credit Suisse said in a note this week that a surge for the Republican candidate would pose risks to US stocks because of uncertainty about his plans and worries about the implications of his trade policies for corporate America.
“With Clinton pulling away in the national polls, and a Trump victory appearing far less likely, we think short term risk for the broader US equity market has been reduced,” they said.
However, the risks have not been eliminated, they added. First, some investors may worry about the potential for both the Senate and House of Representatives to be clinched by the Democrats, and the possible policy consequences.
Second, volatility in general tends to creep higher ahead of presidential elections. The potential for a contested outcome to the election — something Mr Trump has been hinting at with his claims of a rigged process — could also lead to increased nerves in financial markets.
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