I think a Trump victory is quite unlikely. That said, the probability is not zero, it’s likely around 15-25%. At work, I routinely analyze even less likely events and their impact on markets, so I have considered the reaction of markets if Mr. Trump were to win the general election.
There will be almost no place to hide from the initial turmoil. I expect significant turmoil in the financial markets and believe that in the short-term (days/weeks) there will be very few safe havens. Trump’s economic policies are so unconventional, and his temperament so mercurial, that I expect almost all sectors and asset classes to be somewhat affected by negative uncertainty. Precious metals may be the only asset that benefits from a flight to safety.
Bonds have traditionally served as a safe haven in times of turmoil. I believe bond investors are in for a rude shock if Trump does win the presidency. As a leveraged developer, Trump has had a colorful and combative history with lenders. His natural bluster has been regularly aimed at bond markets during this campaign and the prospect of a Trump administration in control of the US Treasury will spook bond investors at some point. He has suggested he would unilaterally default on US sovereign debt (arguably not a novel position since the Republican congress toyed with a similar position in 2011) and seek to renegotiate principal amounts.
Trump has made combative comments about the Federal Reserve and its current policies. He has also expressed dissatisfaction with the current low interest rate regime. Taken together, these sharp, unusual policy views create immense uncertainty about how Trump would manage the credit and repayment of US debt, the government’s relationship with the Fed, and other issues of concern to the broader credit markets. Uncertainty about bonds and rates will also hit real assets heavily dependent on credit markets. I do not expect real-estate to do well.
When it comes to stocks, I expect broad declines in the short term, but some sectors will be harder hit than others. The banking and financial sector is likely to see a steep decline in market sentiment and levels. Trump has made several negative statements about banks and their business models. Banks are also naturally leveraged and very sensitive to market sentiment. None of this augurs well for the banking or financial sectors.
Given Trump’s combative stance on trade and trade agreements, I would expect sectors dependent on imports/exports in their global supply chain to be battered. This includes consumer discretionary, technology, heavy industry, materials, and depending on precise global footprint, energy companies. In contrast, consumer staples should play their standard defensive role.
The immediate sentiment towards the defense industry is somewhat more uncertain. Trump has advocated a far more combative posture on national security and war matters. In almost direct contradiction, he has also proclaimed he would reduce the defense budget and the number of military bases overseas in line with his “America First” pledge. Defense contractors dependent on Pentagon contracts for services to troops overseas will see sentiment and stock prices decline. Large defense manufacturers should decline as well since Trump has expressed skepticism about expensive weapons programs. The foreign policy and defense team Trump puts in place will determine how this plays out.
Beyond the initial few weeks and months, I expect some traditional factors to reassert themselves. A prospective Trump administration caught up in balancing spending, debt, legislative priorities and political considerations would normally be constrained. However, in the event he wins, Trump is likely to have a compliant Congress, with Republican legislative majorities and both Senators and Representatives eager to please the new force in American politics. It is impossible to make longer-range forecasts of what a Trump administration would look like, simply because I do not know his true priorities. I would be extremely cautious about bargain-shopping in the immediate aftermath of a Trump victory.
Trump is unlikely to win the election, but in the event he did, I believe markets will react very poorly. He is in many ways, the opposite of a conservative, and disdains all established societal norms. Trump’s election would engender policy uncertainty on a scale not seen for decades, upending long-range business plans and reducing risk-appetites across the board. I would exercise extreme caution in the event Trump wins.
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@subirgrewal