November 9, 2016
Markets were disturbed when it dawned on investors that Trump became the frontrunner for the presidency. The shuffling and rumble were the manifestation of adjustments in market expectation of a Clinton presidency. Paul Krugman, when apparently asked about the markets and its trouble at the time, glibly stated that the markets would be down forever because of the uncertainty and incompetence Trump represents and will reflect in his policies. Although the elections last night were disturbing, has the US market been fundamentally damaged?
In the beginning, around 9-10 p.m. ET when Clinton was losing Michigan, Wisconsin, North Carolina and Florida, Trump became the favorite to win and uncertainty riveted the markets (the Mexican peso went down, safe-haven investments went up like gold and U.S. Treasury bonds, etc.). Currently, the US is faced with downward pressure on short-term treasury bond yields, suggesting a surge in investment for these bonds. As the WSJ noted, this trend in conjunction with long-term Treasury bond yields, which are hitting “the highest level[s] since March”, can mean that investors are warming up to the idea of a Trump presidency. This steepening of the bond curve suggests that the market is expecting a politically moderate fiscal policy: high fiscal stimulus (on infrastructure, defense, etc.) and low revenue (lower taxes).
Moreover, because yield for short-term bonds are down and the likelihood of an interest rate-hike is steadily decreasing, investors have already started to look for higher returns in what John Authers calls “bond substitutes.” Thus, as investors move on from safe-haven investments, leaving behind gold and U.S. bonds, they will look to stocks as substitutes, like certain shares that pay dividends. Currently as I write this, the US equity market has bounced back due to the cocktail of investor desire for higher returns and investor confidence in a Trump presidency that promotes higher outlay and lower revenue.
So is there reason to panic according to the US equity market? I don’t think so, and if we look to international markets, the European equity markets and the Mexican currency managed to also pull off respective reversals in a steep decline.
The markets have stabilized, raising two questions: 1) have we heard this story before, and 2) can this be a harbinger of what is to come? Recall the sentiment before and during Brexit, where economists were openly stating that a referendum in favor of an exit would cause a sustained and disastrous economic outcome. Yet, markets stabilized within three to four days. Recall Mark Cuban in multiple interviews with MSNBC: he talked about how markets will collapse because Trump is uncertainty-incarnate. But, market troubles have largely subdued within half a day. Thus, ringing the doom bell may have been premature in both cases. What Trump will do as President is exactly what people have been attributing to Trump prior to the elections: uncertainty. Yet a paradox arises. Despite consensus that Trump is unpredictable, markets have still chosen to make bets according to their prediction of what a Trump presidency entails.
Thomas N. Kim
The Financial Times