Would Donald Trump Crash The Stock Market?

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Includes: DIA, QQQ, SPY
by: Cullen Roche

Mark Cuban says a Donald Trump victory would cause a huge stock market correction:

"I can say with 100% certainty that there is a really good chance we could see a huge, huge correction,"

Hmmm. "Really good chance" doesn't mesh with "100% certainty", but let's think this through a bit more. First of all, Trump is running at about 29% odds of winning, according to PredictWise, so this doesn't seem like the likely outcome, but we do know a few things:

  • Presidential cycles are very weak actionable trends. There is conflicting evidence on its efficacy, but I tend to side with the view of Stangl and Jacobsen, who found that the presidential cycle is more data mining than anything else.1 Additionally, the US political system is designed in such a way that the Executive can't exert too much power at any given time, so the balance of power would strike me as much more relevant here than the sole powers of the president. After all, a president with no Congressional support can't get much done. I also tend to believe that American businesses do well despite the policies of Washington, not because of them. Therefore, the stock market's performance under Trump will likely be much more closely tied to things that Donald Trump cannot directly control.
  • One thing we do know about Trump's policies is that he wants to significantly reduce taxes and increase spending on the military and infrastructure. According to the Tax Foundation, the tax policies alone would result in $10 trillion in higher deficits and debt.2 This would be hugely positively for corporate profits, since we're in a period of low corporate investment with a current account deficit. According to the Kalecki Profits Equation, the higher deficit would significantly contribute to corporate profits, which should be good for stocks in the long run. Since his tax plan is the only well-defined policy at this point, we can be fairly certain that, combined with his rhetoric on spending, a larger deficit would result under Trump.

This leads me to believe that Trump would be at least marginally positive for US stocks, although his policies and their impact would be dependent on exogenous factors that we can't fully assess. But most importantly, we have to be practical here. While I am inclined to argue that Trump's impact on the US stock market would be significantly lower than some politicized pundits will claim, we should also be clear that anyone who views the stock market on a 4-year or shorter basis is being highly irrational. After all, according to my calculations, the stock market is a financial instrument that has roughly the duration of 25 years.3 We shouldn't be constructing portfolios built around such short time horizons when the stock market itself is an inherently long-term instrument. Therefore, I find this whole discussion rather unproductive, to begin with, and I probably owe you an apology for having exposed you to it.

1 - See Political Cycles in US Industry Returns, Stangl & Jacobsen.

2 - Details and Analysis of Donald Trump's Tax Plan, Tax Foundation

3 - See, Understanding Modern Portfolio Construction