This year, a new answer was born to questions like ‘why is (insert surprising or shocking event) happening’? The answer is simply: ‘because…2016’. Six months ago, most pundits called it a long shot that that Republican candidate Donald Trump might win the US presidential elections. Then again…itis 2016.
A Brexit was also considered to be a long shot, and yet, Britain did indeed end up unexpectedly voting to leave its European Union membership, sparking off waves of price reactions in the markets. The Gold price climbed so fast that investors got dizzy at the new heights. The Sterling and FTSE felloff the edge of the cliff so rapidly that they left queasiness in its wake.
So, what are the upside and downside scenarios for a Trump win? On the downside, it could look like the Brexit, with the S&P 500 taking the role of the FTSE. Investor confidence may fall dramatically in the short term, meaning losses in the S&P 500. The losses could be anywhere between five and 10 percent for the S&P, ending the eight-year bull run. In this context, the VIX could soar, tracking potential volatility that might follow the unexpected result of the election.
The other asset to take a lead role in this potential drama is the Mexican Peso. Ever since Trump made an election promise to builda wall to keep Mexican illegal migrants out of the US, the currency has been the best financial asset proxy to signal a Clinton win and a Trump loss. The Peso’s downward slide in the wake of the revelations over a new FBI probe announced in the last week of October into Hillary Clinton’s email issue is a fair indicator of the trend it might take in the event of a Trump win. The currency’s losses may even reach 15 percent.
It’s debatable whether the USD would take a hit or be a hit, given that the currency is often seen as a safe-haven in times of volatility. On balance, the USD could maintain and even rise against its rivals in the case of a Trump win, especially considering the Federal Reserve’s interventionist policies and caution since 2007. There’s little doubt, however, that another other safe-haven asset – Gold – would be preferred by traders. When the markets lose their risk appetite in the face of a short, sharp shock, they turn to Gold for comfort.
On the upside, an initial sell-off would create opportunities for smart money to dive in and take advantage of the market correction. Something similar was seen in the wake of the Brexit when the FTSE regained ground on bargain buying and central bank easing hopes.
Medium term, there could be additional developments in terms of investor sentiment. Businessman Donald Trump has made much of his economic policies like cutting red tape, which are likely to be popular with US companies. If his presidency becomes a reality, mergers and acquisitions activity could be boosted and flourish because of fewer regulations seen as restrictive or complicated. Business-friendly policies could also contribute to a reinvigorated financial services sector and investor confidence could return in earnest for the first time since the sub-prime crash in 2007. Stocks in the biotech sector – which suffered losses in the wake of Clinton’s criticism of EpiPen’s price hikes – could recover quickly if Trump is victorious.
A win for Hillary Clinton has already been priced in by the markets ahead of the elections, yet as always when it comes to expectations, they can be disappointed. After all, it is…2016.