U.S. election potential threats to stock market

2016/11/05 14:12
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Election Day could be doomsday ? or just another day ? for Wall Street.

USviewer: With just days until the presidential election, Wall Street remains on high alert. Investors are in risk-watch mode thanks to a bitter campaign punctuated by narrowing polls, candidates with low likability ratings, and unexpected bombshells like claims of Donald Trump groping women and the FBI’s ongoing investigation into Hillary Clinton’s emails.

Here are three shocks that could rock markets:

It would be a big surprise, one few investors saw coming. Even Trump says if he pulls off the upset it would equate to “Brexit times 10,” or way bigger than the shock waves the United Kingdom sent through markets in June when it voted to exit the European Union.

Stocks will likely sell off if Trump triumphs. Barclays says the Standard & Poor’s 500stock index has downside risk of 11% to 13% if the billionaire businessman wins. Declines could be as big as "10% to 15%,” according to a paper by University of Michigan's Justin Wolfers, Dartmouth's Eric Zitzewitz and the National Bureau of Economic Research.

And don’t rule out a bear market if Clinton loses, warns Don Luskin, chief investment officer at financial research firm TrendMacro. “If Trump wins … stocks will drop at least 20% just like that,” Luskin told USA TODAY. “Because markets hate to be surprised and hate it when the conventional wisdom is dead wrong. Just look at the reaction to Brexit.”

Why are investors so averse to Trump? Too many unknowns and too little political experience, says Thomas Block, Washington policy strategist at FundStrat Global Advisors.

“I don't see how investors can envision what his administration would look like,” Block told USA TODAY. “Plus I don't see his harsh rhetoric and take-no-prisoners negotiating style working with strong-willed legislators. Relations with allies in Europe and Asia could seriously deteriorate, and China, with its large U.S. Treasury holdings, would be very anxious.”

Financial pain would also likely be felt if Clinton takes the White House and Democrats retake control of the Senate and House of Representatives, although odds still favor the GOP holding the House. “A Democratic sweep is a tail risk,” says Andy Laperriere, head of U.S. Policy Research for Cornerstone Macro.

An election hat trick would enable Democrats to take fuller control of the legislative process, making it easier for Clinton to push through her less business-friendly platform of higher taxes on the rich and investors, more regulation of businesses and spending programs.

Wall Street prefers political "gridlock" where legislative decisions related to trade, immigration, taxes, health care and regulation are made with input from both parties.

“A split chamber probably delivers the gridlock the market prefers,” says Mark Luschini, chief investment strategist for Janney.

Since World War II stocks have risen 2%, on average, from Election Day until year-end, thanks to the lifting of election uncertainty, according to CFRA, an independent stock and fund research firm.

But what happens if uncertainty doesn’t lift once the votes are counted? Or if violence breaks out, as 51% of voters fear, according to a recent USA TODAY/Suffolk University poll? How would investors react if Clinton wins but her legal troubles related to use of a personal email server while secretary of State worsen and spark a post-election crisis. What if Trump wins and the more than six dozen pending lawsuits now open against him and his company are tried while he's president, or if his controversial policies on trade and immigration get fast-tracked, or his claims of a rigged election gain traction?

Consumer confidence often increases after a presidential election, but perhaps not this time since both candidate are viewed as so flawed and unlikable,” says Gregory Vallierechief strategist at Horizon Investments. “If Trump (loses and) proclaims the election is rigged, perhaps a quarter of all Americans may agree with him. That's hardly a prescription for higher consumer confidence.”

Violence in the aftermath of the election, if it occurs, is viewed as a short-term hiccup.

“If it (violence) was widespread and had economic consequences, such as consumers staying home and not spending, it could (impact markets),” says Luschini.

 

Adds Luskin: “Markets are not typically rattled by violence in the streets. Remember 1968 — riots, assassinations, shootings all over the world — stocks just went higher and higher, through it all.”

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