Clinton good, Trump bad: Market reaction to changing odds is too simplistic

 
Steve Sedgwick
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Mexicans burn a model of Donald Trump during Holy Week (Source: Getty)

Thank goodness Britain is a nation of geniuses (or should that be genii?).

Not even six months after the UK got to grips with the minutiae of EU rule-making and its enormous, surreptitiously dastardly implications for our country, we have all suddenly become experts in British Constitutional Law.

We have had a lot of assistance of course from the tabloids, which have helped us navigate through the parts of Parliamentary Acts, conventions and court rulings that we were a bit rusty on. But the long and the short of it is that most of us are now clear that High Court judges are “enemies of democracy,” just like the EU, in fact just like anyone who has the temerity to question the will of the 17.4m who voted out.

Read more: The referendum is over: Let’s act like it is

Equity markets have applied the same cold hard logic in evaluating Brexit. After the initial wobble on the Friday and Monday after the vote in late June, they have decided – with a little bit of help from a tumbling pound – that all is well and the FTSE 100 is over 1,000 points up from late June lows.

All that scaremongering beforehand has so far proved to be just that, and the economy in moving ahead at a glacial pace despite the fact that we still have no idea over when the Rubicon will be crossed, whether Article 50 will be enacted, and what on earth our relationship with Europe will be like.

It’s a good job the US presidential vote is just as simple for all of us. Judging by the early moves Monday after the FBI cleared Hillary Clinton for a second time over her emails, it’s easy – she wins and equities go up, Trump wins we go down! Job done!

Hillary Clinton
Clinton has been cleared by the FBI once again (Source: Getty)

But is there any real logic for this binary conclusion?

In terms of the pure economics, analysis of both candidates’ proposals suggests the markets may be getting a little bit ahead of themselves. High Frequency Economics’s Jim O’Sullivan believes a Clinton presidency will have a “close to neutral” fiscal policy, adding that, in her first year “the net result is virtually no impact on the deficit relative to the baseline projection”.

O’Sullivan also rightly questions the willingness of the US Congress to sign off on both Clinton spending and taxation plans. In addition, even if she were able to put meaningful corporate tax code reform on the table, including the thorny issue of the treatment of foreign earnings, High Frequency Economics believes legislation is unlikely before 2018 and even that could be ambitious if there is no bi-partisan support.

Read more: Trumponomics is big, bold and brash – but less unorthodox than you think

It’s not a dissimilar story were Trump to enter the White House, with little hope of Congress rubber-stamping his proposals. That said, O’Sullivan believes equity price slippage could be enhanced by anti-free trade rhetoric.

So where is the science behind the market’s binary presidential view? The good news is there is a little historic support for the market’s interpretation of the US election. The fact is markets tend to perform better during Democratic rather than Republican presidencies, says O’Sullivan.

The market historians also like to take a look at PECT, or presidential election cycle theory, but this hardly supports early-term equity market gains and is “probably random”, according to High Frequency Economics .

The good news is we’ll hopefully know one way or another who is going to be the next US President in the next 24 hours or so. Thereafter we can put it behind us, and can all go back to our usual overriding obsessions with the Fed’s next rate hike, European Central Bank tapering, Opec tinkering and the not-too-small matter of stretched equity market valuations. Phew!

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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