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For a while there, it looked like Democratic nominee Hillary Clinton was the clear favorite to win the US presidential election.
But as the votes have been gradually tallied, the odds of have become less clear, with the odds of a Donald Trump victory gaining steam.
Markets are reacting violently with Dow futures plunging over 700 points late Tuesday.
In a nutshell, Clinton represents a continuation of the current administrations policies. Trump represents anything but that. With Trump, you have the promise to repeal much of the work of the Obama administration, while aggressively pushing policies that appear unfavorable to many of the US’s multinational corporations.
Trump represents uncertainty, and in the short-run investors and traders hate uncertainty.
A case can be made for a mid-teen percentage plunge
Macroeconomic Advisers recently warned that a Trump win would wipe out 7% of the S&P 500’s (^GSPC) market value, which amounts to over $1 trillion of wealth. Strategists at Citi and JPMorgan have also warned of sell-offs in the range of 3% to 5%.
“Equities and the economy are all about confidence, which would be fragile,” Parker said. “A ‘V’-shaped recovery is less likely, and the path for equities should be driven by Trump, GOP leadership, the Fed and data – and whether they engender confidence, or not.”
“If Trump wins, we see the S&P falling to ~2000 initially, or 9% from the high,” Barclays’ Keith Parker said on Tuesday. “However, without recession concerns, the necessary pre-condition for a correction [or 10%+ decline] is absent.”
“Investor concerns over Trump trade policies and uncertainty over his policy plans would weigh on equity markets,” Credit Suisse’s Lori Calvasina said on Monday. “Our base case is for incremental downside of 5-10% from the Nov 7th close, but a case can be made for a decline in the low to mid teens.”
History is riddled with surprisingly bad news
Calvasina considered some recent uncertainty shocks to derive her forecasts: “Brexit was followed by a 5% drop in the S&P 500. When the S&P 500 falls after Election Day, drops between Election Day and year end average 5% (range of -1% to -9%). If a Trump victory is viewed as a more onerous financial market event (similar to 9/11, the US debt downgrade, the European debt crisis, or the contested 2000 US Election), declines from the August 2016 highs could total -12% to -17% (another 9.6-14.7% from Nov 7th levels). History also tells us that a changing of the guard in the White House has been accompanied by a spike in volatility and a decline in equity markets, and that S&P 500 returns are weaker under Republican Presidents than Democratic ones and when Washington leadership changes than when it stays the same.”