Donald Trump and Russian Roulette

Chris Brown, CIO, 2nd September 2016

Our favourite way at looking at the US election is via poll of poll data compiled by people like Nate Silver at fivethirtyeight.com. At its recent highs, he estimated the probability of Hilary Clinton winning in November at 83% (see Chart 1 below). One way of looking at this is that Donald Trump is not (for now) something to seriously worry about. Another way (especially for those of us still reeling from the Brexit vote) is that Trump’s chances of winning were (at its lows) roughly the same as losing at Russian roulette. Just as we wouldn’t feel comfortable putting that gun to our head, we don’t feel comfortable proclaiming the all-clear for a Clinton victory in November.

Chart 1: US election odds since JuneUS Election Odds Since June

Based on average of current polls, source: fivethirtyeight.com

Given a Trump victory should be considered as a serious outcome, what would it mean for markets? BCA research had a go at answering this by looking at the correlation between the rises and falls in Trump’s popularity (which you can see above) and moves in equity and bond markets. Their conclusions are shown in Chart 2. When Trump’s popularity has risen bond yields and equity markets have fallen. So a Trump win looks to be bad news for equities and good news for bonds.

Chart 2: Trump and the US markets

Trump and the US Markets

Source: BCA Research

However, this looks more like correlation than causation to us. As an example, Trump’s spike in early August was due to the (normal) bounce in popularity that comes after the 3 day advertorial that is the Republican convention. However, early August was also right after the Brexit vote. Trump is an influential man but giving him credit for the sharp fall in bond yields post-Brexit looks like a stretch to us.

So if market moves don’t have much information for us, what else can we say? We have three initial thoughts on the impact of a Trump victory:

  • While US presidents are constrained by Congress and Senate domestically, they have a fairly free hand in foreign policy. So it is here that the full force of “The Donald” will be felt. Geopolitical risks would surely rise.
  • However, as presidents are so constrained domestically, why should the value of US corporations be affected by a new man in the White House? It is hard to see how Trump would affect the value of, say, Apple in the short term. In the longer term, the Fed is always there to use monetary policy to offset the mistakes or uncertainty caused by politicians. As with Brexit, we think it would be wrong to over-estimate the impact of a rise in political risk on broader equity markets.
  • As an illustration of this, we think Brexit is unambiguously bad news for investment in the UK and hence the UK economy. Why make a longer term investment decision when you don’t know what the new rules of engagement with the EU will be? Yet in spite of this US equities are now up 5% from their pre-Brexit levels and the UK’s All-share index is up a whopping 15% from the mid-June lows. Explain that to a visiting Martian! The broader message for us is we need to stay diversified and be as resilient as we can to these sorts of surprise market and currency moves.