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| moneyfire |
Macroeconomic Advisers, a St. Louis forecasting firm, recently analyzed the impact of a Donald Trump versus a Hillary Clinton win in November on the overall stock market. There was a stark difference. A Clinton win, the firm says, would produce a 4% rally in the stock market. But a Trump victory would send stocks sliding by a steep 7%.
The market capitalization of the S&P 500 is about $18.6 trillion, so a 7% drop would slash about $1.3 trillion off the value of companies in the index. If you include the 4% gain investors might otherwise book from a Clinton win, the total cost of a Trump win would be more than $2 trillion.
Trump supporters will undoubtedly argue with the assumptions and methodology that produce such a forecast, and predicting the direction of the stock market is, of course, risky business. But the Macro Advisers forecast for stocks mirrors other analysis of the Trump economic plan. Moody’s Analytics, for instance, predicted it would kill 7 million jobs and cause a recession. Another analysis, by Oxford Economics, found the impact of Trump’s plan less severe, but still said it would induce a slowdown.
Macro Advisers used recent data to gauge market reaction to the rising and falling probability of a Trump victory and predict what might happen if he actually wins. It started with the regularly updated electoral odds calculated by the website 538, which currently gives Trump a 28.4% chance of winning. Macro Advisers then drew on its own data showing the market-determined equity risk premium, which shows the extra return investors demand in order to hold stocks, which can be volatile and lose value quickly.
The firm says there has been a statistically significant correlation in the two variables, meaning that the equity risk premium has risen when the odds of Trump winning appear to go up and fallen when the odds fall. In plain English, investors become more fearful of stocks losing value should Trump win and more confident of stocks gaining value if Clinton wins. That led to the predictions of a 7% plunge if Trump wins and a 4% gain for Clinton.
Economists and investors worry most about three planks of Trump’s economic plan: threats to tear up free-trade deals and impose new tariffs on importers such as China and Mexico; a large tax cut that would add trillions to the national debt; and new restrictions on immigration that would stunt growth in the labor force. All would be likely to cut into corporate earnings, at least in the short term, triggering a selloff in stocks.
Businesses also worry about Trump’s criticism of Federal Reserve chair Janet Yellen and his promise to replace her, which would shake up the one institution most able to calm jittery markets. If a President Trump were to attack the Fed—especially during a market selloff—it would be the market equivalent of blocking firefighters from a fire.
On the other hand, markets might decide Trump isn’t so bad after all, especially since he wants to kill regulations that have been on the books for decades and let thousands of small- and medium-sized businesses keep more of their income. Bargain-hunters might even start to buy stocks on November 9, as their frightened competitors sell. This year’s election might not be good for business, but it’s certainly keeping gamblers attentive.
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