Trump versus Clinton: Implications for markets – Westpac

Research Team at Westpac, suggests that in the wake of the poorly received Republican convention, the probability of a Clinton win surged as high as 80%, according to Nate Silver’s 538 site (“polls plus” measure).

Key Quotes

“But polls in recent weeks have shown the contest gradually tightening, with Clinton now rated only a 60% chance. Political risk for markets is already rising and is likely to increase sharply ahead of the 8 Nov election day. In particular, event risk will rise around the official debates, set for 26 Sep, 9 Oct and 19 Oct (plus VP debate on 4 Oct).

Whereas a Clinton presidency seems likely to be similar on key policy issues to the current Obama administration, a Trump presidency carries significant risks and unknowns for markets. Checks and balances in Washington, D.C. could limit the extent to which Trump’s policy proposals ever become a legislative reality, but if he wins the presidency, then he is extremely likely to enjoy a Republican majority in both House and Senate, providing the freest hand for a president since Obama’s 2009-10 window of full Democratic control. (In contrast, a Clinton presidency is very likely to face a hostile House). A Trump presidency would bring about the biggest changes in many decades in existing US arrangements on everything from taxation policy, to trade policy, social spending, immigration and geopolitics.

While Trump’s policy agenda lacks detail and consistency he has held a somewhat steady position in three key signature policy areas:

• significant tax cuts;

• trade protectionism; and

• immigration restrictions

Trump’s proposals in each of these areas will have far reaching consequences for the US and global economy. Trump’s proposed tax cuts are worth in excess of US1 trillion per year and would deliver a huge boost to growth, if ever enacted. But that would put the US fiscal accounts on a dangerously unsustainable track. A trade war that would ensue from his protectionist policies, not to mention the confidence shock, would in any case more than offset any tax cut inspired boost to the economy. Trump’s plan to deport millions of undocumented immigrants – looking through the almost impossible impracticalities - would also deliver a large negative jolt to the US labour force and growth. On balance Trump’s key policy proposals deliver a lot more harm than good.

One cannot rule out a brief US growth slump in the event of a Trump win. The UK Brexit vote provides a useful analogy – US financial conditions would likely tighten sharply, confidence would take a hit and amid a surge in uncertainty in many key areas of US policy spending and investment could slump in the weeks and months following a Trump victory.

Clinton’s key economic proposals are much more modest. She proposes modest tax increases of about $100bn pa on high income earners, tax cuts for middle income and small business, raising minimum wages and a 10 year $275bn infrastructure plan. A Clinton presidency would represent continuity in many key policy areas and thus a steadier near term US economic picture than the uncertainty and volatility that would initially confront markets and the economy under a Trump win.

Our baseline view is that a Clinton win would be more supportive for both immediate and long run US growth prospects and thus also equity markets. This also implies higher US yields, including the Fed funds rate. The US dollar is likely to be higher in 2017 under a Clinton administration but could slip back in November in the event of a relief rally in risk assets. An aggressively protectionist trade policy is a key factor in our expectation that a Trump win would produce greater volatility and a weaker US dollar.”