Markets and the ‘shy’ Trump supporter

Posted on November 14, 2016

Donald Trump’s unexpected victory in the US elections has prompted mea culpas from wrongfooted pundits and further vitriol directed at the befuddled polling industry. Financial markets have suffered no such soul searching, switching breezily from fearing carnage in the event of a Trump victory to cheering the arrival of the property tycoon-come-reality TV star to the White House.

This begs the question: did investors simply change their minds or are we witnessing the financial equivalent of the “shy” Trump supporter, with markets collectively unwilling to voice their support for the Republican candidate before his victory was confirmed?

While a few days is far too short a time to gauge what a Trump presidency will mean for the world — especially given the unpredictability of the man himself — there has been talk since his win of a paradigm shift for global markets. Investors are pricing in a brave new world of “Trumpflation”, where increased fiscal stimulus will result in higher inflation, higher interest rates and a boon for a number of US corporate sectors that are expected to benefit from looser regulation. Equities in the US ended the week above where they were before the vote and Treasury yields, which typically fall during times of heightened risk or uncertainty, moved sharply higher.

Markets are erratic at the best of times, but for anyone who had been listening to financial commentators in the weeks preceding the election this reaction must appear bewildering. A victory for Hillary Clinton, in the minds of many strategists, was expected to result in a welcome reinforcement of the status quo. Her entry into the White House would clear the path for the Federal Reserve to gently raise interest rates. US stocks rallied last Monday as Mrs Clinton’s poll numbers indicated that her position was strengthening after a week of negative headlines.

A Trump victory on the other hand was viewed by many as likely to send shockwaves through the global economy. Investors were being advised to hedge themselves with gold and put options and brace themselves for a rough ride should the unthinkable come to pass. So what can possibly explain this apparently jarring dissonance between the collective wisdom of markets before and after the vote?

One explanation could be that, much in the same way some have since spoken of the phenomenon of the “shy” Trump voter who failed to appear in traditional polling, financial markets were in fact displaying their own sort of bashfulness about their true feelings towards the Republican candidate.

The financial professionals whose analysis and commentary helps to shape consensus opinion in markets are human beings. In the run-up to the Brexit vote many investment banks in the City were strong and vocal backers of the UK remaining inside the EU. An analyst working inside one of those banks could have been strongly incentivised to avoid publishing work that appeared to encourage a favourable view of a vote to leave. Ahead of the US elections the views of these same analysts may too have been muddied by their politics and professional demands, or clouded by the dominant consensus.

A different explanation is simply that markets quickly realised that some of the things a Clinton victory were expected to bring, such as higher interest rates, were likely to also arrive with Mr Trump. In this sense the idea of his victory marking a game-changing moment may be illusory. The market reaction we saw last week may well have played out in a roughly similar way if Clinton had won.

At the heart of the “Trumpflation” idea is that the president-elect is going to focus less on reducing borrowing and instead spend money on infrastructure. Mrs Clinton had also promised, in her words, “the biggest investment in American infrastructure in decades” involving $275bn being spent over five years. The difference between the two is that Mrs Clinton would likely have suffered from stiff Republican opposition in Congress, but it is not as if the idea of fiscal stimulus was Mr Trump’s alone.

Markets have also decided that Mr Trump’s victory does not pose an immediate impediment to the Fed raising interest rates. Before the election the consensus was that a Clinton victory would be followed by a tightening of monetary policy, while the uncertainty caused by a Trump win meant all bets were off.

There was also concern that Mr Trump’s attacks on Janet Yellen, who had been accused by the president-elect of being a political stooge, meant his triumph could result in the Fed chair being forced out. Instead, Mr Trump’s advisers have indicated that the Fed Chair will stay on until the end of her term. By the end of last week Stanley Fischer, the Fed’s vice-chairman, said interest rates were still likely to rise and that looser fiscal policy could boost economic growth.

In short, he said the same things he would have been likely to say if Mrs Clinton had emerged victorious. As such it seems reasonable that the market reaction to a Clinton victory, at least in broad terms, would have been fairly similar.

The real impact of a Trump presidency will not be known for some time. Until then, we are left with further evidence that financial markets are not only as poor as everyone else at predicting political events but are sometimes even unsure about what they want once the results are known.

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