(CNBC and ThaiResidents.com) – Wall Street’s long-running view that Hillary Clinton would easily become the next president has been replaced by a new fear that Donald Trump could win, and it probably won’t be a pretty picture for stocks if he does.
Bond yields have moved lower and so have stocks, as the markets have begun to react to the possibility of a Trump victory in the last several days. The S&P 500 on Wednesday was off 13 points at the key support level of 2,097 and was down 1.3 percent for the week so far.
The work of two economics professors may provide a glimpse of how the stock market might react if Donald Trump were elected. They studied the predictions market, including PredictIt.org and the reaction in the financial markets to events around the election. One of the economists says their findings point to a sharp immediate sell-off if Trump wins and a slight rally if Clinton wins. The amount of the rally or sell-off depends on the predicted outcome.
“If we were to go in 70/30 [for Clinton], and we think the market is 10 percent higher under Clinton than Trump, if Clinton wins it should be up about 3 percent and if Trump wins, it should go down 7 percent,” said Eric Zitzewitz, economics professor at Dartmouth College. He and Justin Wolfers of the University of Michigan studied the market effect of the first debate in a Brookings paper. Clinton’s odds in the prediction markets had been closer to 80 percent, and at that level, a Trump victory would have triggered an 8 to 10 percent sell-off, he said.
The market’s nervousness picked up after the FBI last Friday revealed a new investigation into Clinton’s email server, this time involving her longtime aide Huma Abedin and her husband Anthony Weiner, who is under federal investigation in a different matter.
“There’s no question in my mind that the markets have not priced in a Trump win, only in the most cursory way. They are starting to price in the potential for a Trump win. That process started last Friday,” said Tony Roth, CIO of Wilmington Trust. “We haven’t seen an up day in the markets since then. We haven’t seen any calamitous days either.”
Strategists agree there would be a sell-off with a Trump win, but then the views diverge on how the market would trade after that.
Ethan Harris, head of global economics at Bank of America Merrill Lynch, said he would expect a sell-off if Trump wins, then an L-shaped move in the equity market, because of the period of policy uncertainty.
“From the action in the stock market, the equity market is worried about a Trump victory, about the uncertainty of policy under Trump. Normally the equity market responds positively to a Republican doing well in the election,” he said. “In this election, I think the dominant story is about uncertainty after the election, and a status quo election means no shock, everything is the same, no big news and presumably the equity market sails through the election if it’s a split government.”
Markets had been looking for a win by Clinton but also Republicans holding the House and possibly Senate. The idea is that that would create gridlock and many of her policies could not be enacted.
“Under a Trump victory, you probably get some kind of reaction in the equity market, and if it’s a strong reaction, it could affect the Fed,” he said. Harris said he would expect to modestly lower his GDP forecast if Trump wins. “To a large degree, we’re going to look at the market’s response as a gauge of the underlying uncertainty shock,” Harris said.
Asian markets wavered late morning after a short-lived recovery, even as oil prices jumped more than 1 percent.
“Asia markets [saw] a technical rebound, but it not a strong one, given that political uncertainty in the US and the plunge in crude oil prices are two bearish factors that will continue to weigh on market sentiment,” Margaret Yang, market analyst at CMC Markets, told CNBC.
Meanwhile in Thailand, Dr Win Udomrachtavanich, chairman KTB Securities told Thansettakij.com this morning that there has been comparison between the US election race and Brexit and it is feared that a Trump victory would lead to a greater turmoil in the currency market than Brexit.
Investors are currently adjusting their portfolios to be ready for a possible Trump win.
“What we noticed yesterday was some large sector stocks were positive while others negative but it tilted more towards the latter. This is something we don’t see often because they mostly go up or down together and is a sign that investors don’t think the market is in that bad a state.
“There was selective buying of stocks with the key issue being FBI’s new investigation into Clinton’s email sever, Bank of England’s meeting today and the crude oil price.”
The Stock Exchange of Thailand main index edged up by 0.18% or2.67 points to reach 1,501.32 at midday today with trading value being 23.596 billion baht. SET50 Index climbed by 0.09% or 0.87 points to reach 938.62 with trading value being 10.591 billion baht. Meanwhile the Mai Index added 0.91% or 5.28 points to reach 586 with trading value being 1.417 billion baht.
Top: A stock trader is completely confused about which way to go. Photo: Chris van Dyck (CC-BY-2.0)
Source: CNBC, Thansettakij.com, ThaiResidents.com