With the U.S. election fast approaching, the markets are now just over six weeks away from the possibility of President Trump. It’s been a bizarre election campaign (to say the least) with so little of the debate centred on public or fiscal policy. In short, no one knows what to expect from Trump. He’s spoken about building a wall and screening immigrants but what exactly is his economic policy? The Republican traditions of reducing regulation and cutting tax can be expected, but to what extent no one knows. If Trump were to win, is it possible to predict how the markets might react?
“It’s difficult because he flip flops so often, nobody knows what they’re dealing with,” explains John De Goey, Portfolio Manager at Industrial Alliance Securities. “After the Brexit vote, the markets dropped like a stone mainly because the result was unexpected. Within a week or so, the markets had not only gotten back to where they were prior to the vote, they went higher.”
“There may be a violent reaction, but when people recalibrate it will turn out to be short term volatility.”
To summarize, De Goey doesn’t expect a massive move in either direction if Trump wins on November 8th
. The latest polls still show Clinton as favourite but there will no doubt be some more twists and turns in a presidential race that’s almost devoid of political and financial policy.
Canada’s election run-in last year was a completely different – sensible – affair, but it can be used as another good example of how markets react to results. In the lead-up, the Conservatives were seen as good economic managers and there was concern surrounding the Liberals’ proposal to cut taxes for the middle classes, increase tax for the 1%, and the impact of running deficits. “Despite that, the day after the Liberals won a majority, the markets went up,” says De Goey. “So the conventional wisdom of what’s good for markets often gets turned on its ear when things play out.”
De Goey is in no doubt that if Trump does get elected (a big ‘if’), and implements the policies he seems
to be suggesting, it’ll be bad news for Canada. “Increasing local production, raising tariffs and reducing imports will be negative for Canada,” he says. “Canada is an open, trading economy so it will harm our trade numbers and our exporters in particular.”
The reality of what’s said on the campaign trail and what plays out in reality is, of course, a whole different matter. “Many politicians get into office and find out they can’t do what they promised,” De Goey says. “If Trump were to enact the policies he’s suggesting, it would be bad for Canada. But it’s doubtful that he could proceed with his business agenda even if he did get elected.”
De Goey advises Canadian investors not to make any knee jerk reactions regardless of the result. “The history of capital markets is littered with the carcasses of people who have overreacted to supposition,” he says. “Going back to 1950, there is no meaningful correlation between market moves and the election of any prime minister or president. The irrational knee jerk moves will be made by emotionally driven speculators who are not really cut out to be investors in the traditional sense.”