Do The Financial Markets Prefer Clinton Or Trump?

| About: SPDR S&P (SPY)

I recently got an email from someone who said they were going to sell all of their stocks until after the election was settled. They think Clinton will win and that her "tax and spend" policies will cause interest rates to skyrocket, which will crash the stock market. They say they will then "reinvest after the election and earn some easy profits". Does this really make sense though? Let's dig a little deeper.

First, I suspect the financial markets prefer a Clinton victory at this point. It's not that Clinton will be a better president. No, that's got nothing to do with it. It's that Clinton's victory won't bring about much uncertainty. After all, with Clinton we're looking at policies that aren't drastically different from Obama's, so you get 4 more years of the status quo to some degree. Your politics might not agree with that, but the financial markets have certainly enjoyed stability in the Obama years. Markets like certainty, and the status quo is certainty.

With Trump, the markets get someone who claims he might write down the national debt and spend even more than Clinton is planning to spend. As I've noted before, Trump is a super-Keynesian who will blow out the budget. I think that would be hugely stimulative in the long run, but it could also result in a good deal of uncertainty at first. Also, we have little to no clarity on what Trump wants to do with foreign policy or, really, anything. So, unlike Clinton, a Trump victory would create a good deal of uncertainty, which markets might price in before the election. Since markets don't like uncertainty, I wouldn't be shocked if a Trump victory created a Brexit type of decline (and then recovery).

But the answer to these questions might already be settled. After all, prediction markets have been pricing in a Clinton victory for a very long time. Trump has plummeted all the way to 12% on PredictWise, and the stock and bond markets have been very stable over that time period. So, I think it's safe to say that the markets are already pricing in a Clinton victory and don't see anything too worrisome there. The real risk, however, is that the polls and prediction markets are wrong. In that case, a Trump win could insert a good deal of uncertainty into the future of the US economy and the financial markets, which would increase volatility. That's looking unlikely for now, but with the way this volatile election is playing out, we can't count out a black swan event that changes the momentum quickly.

All this macro musing is all well and good; however, there are probably more important lessons here to keep in mind:

  • Big political or entertainment events are usually not worth churning your portfolio over. All this does is try to time a highly uncertain event, while guaranteeing that you'll incur higher taxes and fees.
  • Timing a big event like an election is unusually difficult. For instance, this investor thinks he will "buy back" after the election to earn some easy profits. But the odds are that the markets will move much faster than he anticipates and will price in any outcome well before he has an opportunity to profit from it. In this case, an election outcome will likely be priced in well before the election is over and the investor actually acts on it. As a result, timing the market is usually difficult not only because your analysis has to be right, but you have to predict how the market will time when and how it prices in that analysis.
  • Presidents don't determine how innovative, creative and hardworking we all are. Whether Trump or Clinton wins the election, I am certain that millions of hardworking people will continue to get up in the morning trying to do great things. Presidents aren't unimportant, but it would be a mistake to confuse the president as an excessively important economic driver.

In short, don't let the presidential election scare you into big political moves. While the media wants you to think that the president will determination the outcome of the USA in the future, the reality is that the future of the USA and market prices will be much more influenced by the everyday actions of the people in the economy and not the bureaucrats pulling strings on the fringes.