(Before anyone points this out, this column said only two weeks ago that Mr Trump could not win without external assistance, even though a majority in the US was open to be persuaded to vote against globalisation and the status quo. Since then, the FBI’s intervention seems to have given him that assistance, while his own uncharacteristic self-discipline has helped people focus on the issues. His chances now appear realistic.)
Thankfully, the UK’s Brexit vote gives us a road map of what to expect when electorates kick the globalised status quo. It goes as follows:
First, there will be horror and a big sell-off, centred on US stocks and the dollar (Treasuries, overvalued though they are, might counter-intuitively gain, thanks to their haven status). The Brookings Institution’s estimate of a fall between 10 and 15 per cent seems overdone. Nine successive daily falls for the S&P 500 as Mr Trump’s polls have improved, have priced in some of this risk. But it would be quite a day, particularly as Mr Trump tends to be viewed with horror outside the US.
After this, we can expect a re-run of the Brexit rebound, at least for stocks, while a lower dollar acts as a cushion. The Fed decides against raising rates after the shock, investors realise President Trump does not take office until January, they re-examine the constitution. They realise there are limits on his freedom of action. That implies a buying opportunity for US stocks, particularly multinationals that benefit from the cheaper dollar and those that stood to be harmed by a Clinton presidency, like healthcare stocks. This would accord with the phoney warfrom July to September, when UK assets recovered.
The US is more important for the rest of the world than is the UK. A weaker dollar means strength for the yen and euro, the last thing the eurozone and Japan need; it helps emerging markets, many of them loaded with dollar-denominated debt; it might help sterling.
Once President Trump is in office and making decisions, his lasting impact will grow clearer. It is a fair bet that there will be a period of market vulnerability, as we have seen in Britain. What then?
Much depends on war-gaming out his relationship with a Congress presumably led by Paul Ryan, a deficit hawk, where the anti-government Freedom caucus would have an effective veto. It is a popular assumption that this leads to a significant, but not wildly irresponsible, move towards fiscal stimulus, while the Fed raises rates with great relief.
That would in all probability be a good outcome for the US economy, if it can overcome political impediments. It would push up treasury yields.
Among stocks, cyclical international plays, which have come back into vogue, would prosper. High dividend-yield plays reliant on low rates would suffer. International investors are keen to invest in defence and infrastructure stocks, for which Mr Trump has aired some enthusiasm. If inflation and uncertainty are back, then real assets gain, from timber to industrial metals to real estate.
Put this together, and US assets perform poorly even as the economy recovers, the combination many of those revolting against the tyranny of rising capital markets and stagnating living standards would be voting for. Bonds in the long run do badly, making for lower valuations for stocks, but there are opportunities in assets that benefit from inflation or cyclical growth.
The risks? The belief that monetary policy is about to give way to fiscal policy is sensible, but faces many political obstacles, whoever wins. Mr Trump, via tax cuts, is likelier to get a stimulus off the ground than a President Clinton. But the risk of a mess is real.
Under Mrs Clinton, the risk is that the status quo would grind on, implying continued risk of crisis further down the road if and when bond yields rise. Under Mr Trump, the risks appear greater because he is an unknown quantity. Perhaps most significantly, the markets would take fright if he tries to infringe on the Fed’s independence.
Again, the Brexit playbook provides the model. As we have seen post-Brexit, expect the market to fall after an alarming pronouncement (Theresa May’s conference speech), and gain after a political development that shows Mr Trump cannot have it his own way (this week’s Brexit court ruling).
Crucially, he would have a mandate to reverse globalisation. Trade could fall. The people want this, international markets do not, and the beneficiaries of globalisation (emerging markets and multinationals) would suffer.
In the long run, the range of possibilities under a President Trump defies imagination. But in the short run, investors should follow the Brexit playbook.
