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FINANCE ELECTION 2016
What Comes Next for the Markets After Donald Trump’s Win
by Lucinda Shen @ShenLucinda NOVEMBER 9, 2016, 12:05 PM EST
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Economists see incredible uncertainty.
The unexpected victory of businessman Donald Trump Tuesday night in the race to become America’s 45th president sent shockwaves through global markets.
Though S&P 500 and Nasdaq futures fell 5% overnight, U.S. markets managed to recoup those losses and even post gains in early Wednesday trading. Dow Jones futures plummeted by over 800 points Tuesday night, but the Dow Jones Industrial Average was up by about 1% by noon Eastern Time Wednesday. Japan’s Nikkei 225 was down 5% after a slide on Wednesday morning, but the Shanghai Composite, which fell as much as 1.3% in early trading, largely reversed those losses.
Perhaps more telling were movements in bond markets: Treasury yields were much higher as of midday, as investors anticipated that Trump’s plans for tax cuts and infrastructure spending would widen U.S. deficits and drive up interest rates.
As for what comes next, no one can be even remotely sure. The presidential seat will be the first political position Trump has ever held, and already the president-elect has promised many policies challenging the status quo. He has threatened to impose much higher tariffs on imports from Mexico and China, alongside other rhetoric that threatens globalization.
Here’s what analysts in the financial world have to say:
Citi‘s group of analysts, led by Tina Fordham, commented on the surprise Republican capture of the White House and its retention of majorities in the Senate and House. The team noted that Trump’s tenure in the White House will likely be marked by uncertainty, and could put the expected December Federal Reserve interest rate hike on hold. The Citi team wrote:
Trump has no experience in government, and his tenure as President will likely be marked with unconventional, and potentially erratic, policymaking that departs substantially from the political modus operandi of the past, whether Republican or Democrat. This expectation of change was a major driver of his popular appeal, but it is likely to unsettle markets….A Republican sweep of the White House and both chambers of Congress raises the risk that Trump will find support to pursue his more ambitious campaign agenda items such as invoking a trade war that may weaken US net exports and reduce business investment. This is our near-term recession risk scenario, that likely would either keep the Fed on hold indefinitely, or even prompt interest rate cuts to offset the recession-related damage to the US and global economies.”
Evercore ISI‘s Terry Haines noted that while the Senate, House, and White House are now united under the Republican party, the divide between Trump and his party still exists. That suggests that the uncertainty Trump might bring to the presidency will be tamped down by Congress — meaning less volatility for global markets.
Put bluntly, Trump cannot unilaterally change laws or regulations with the stroke of a pen. This Congress and its leaders — Speaker Ryan and Majority Leader McConnell — are intent on restoring the legislative branch as a coequal branch of government: one plank of Ryan’s “Better Way” legislative proposals is about ways to achieve that goal regardless of who becomes president. The new Republican Congress, in proportion very like the current one, is not going to kowtow to a President Trump, but rather will seek to drive the policy agenda. It is for this fundamental reason that we continue to favor the “pragmatic” Trump over the “populist” Trump scenario: Congress will not permit presidential freelancing both for constitutional and purely political reasons.”
Cowen‘s Chris Krueger though noted that the “smashing win” will result in a cabinet that reinforce’s Trump’s campaign behavior in a analysis bracketed by lyrics from Lynyrd Skynyrd’s “Tuesday’s Gone.” Now investors must wait to see who will be in Trump’s cabinet.
“Trump sworn-in as President on January 20 with a GOP House and Senate. Budget reconciliation rules mean passage of tax/ health care/deficit bills with simple majority. Trump unilateral power on tariffs,” Krueger wrote. Over the next 100 days, he added that investors should watch out for these scenarios: “Democratic Party meltdown/ circular firing squad; Tea Party/Trump coup against Paul Ryan (Sean Hannity stated last night he should not be Speaker); President Obama reaction, Lame Duck – literally zero chance for Judge Garland, TPP, or anything else of meaning; Trump Cabinet announcements (Trade posts will be key to watch); Trump dialogue with House and Senate GOP leaders (this is also critical – and is the anchor on the Bull Trump Case).”