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2016 Election Night Revisited
Way back in mid-October 2016, we gave considerable weight to the possibility that Donald Trump could win the Presidency. At the time, nearly all the major polls in the nation were calling for a convincing win by Democratic candidate Hillary Clinton. On election night, it turned out that we actually called one of the biggest upsets in political history. However, what we got wrong was the market reaction to what would happen if Trump actually pulled it off!
We focused heavily on a President Trump who would overturn alliances and trade agreements like NAFTA, as well as launch a trade war, replete with steep tariffs that would stifle both our economy and the international economy. Based on that, we thought the knee-jerk reaction to a massive surprise would be an equity sell-off and a Treasury bond rally. We thought that more “certainty” with Hillary Clinton would be replaced with great uncertainty of a Trump presidency. Generally, markets hate uncertainty. However, the reaction to a surprise Trump win was equity and risk market euphoria, the likes of which have rarely been seen. What made the market move even more remarkable is that a Hillary Clinton victory was fully priced into the market by Election Day, and had been given heavy weighting since the summer Republican and Democratic conventions. It was not as if the markets were preparing to crash if Secretary Clinton won. However, we guess an argument can be made that a Clinton win was holding the markets down, considering how they sprung into space when she lost!
After the election, equity markets essentially ignored Trump’s trade policy promises and focused on big corporate tax cuts and the roll back of environmental, business, consumer protection, and financial regulation. Equities soared and Treasury yields spiked when Trump pulled off his win. However, we remember a few sage investors saying in the days that followed the stunning result that there was no chance President Trump would do the a lot of the “crazy” things he said he was going to do, such as launch an all-out trade war with China—replete with steep tariffs—tear up NAFTA, and put heavy pressure European allies for better trade agreements—literally all at the same time. It would hurt the economy, which is always bad for Presidents looking to get re-elected. What we have come to learn after nearly four years is, while people have many opinions about President Trump, there is one constant—when he says he is going to do something, he nearly always does it.
The regulation rollbacks came swiftly, and, by the end of the first year, Trump and the Republican Congress passed a sharp corporate tax cut. The economy—already in a decent growth mode—boomed for most of 2018 and stocks and risk assets had a moon shot. However, by the end of 2018, as the President started making good on his promise to go to trade war with China, while simultaneously skirmishing with Western European nations, uncertainty and supply chain disruptions began to take over and the economy began to slow before COVID-19. We will never know what would have happened with the 2020 economy if COVID-19 did not strike. If you look at stocks, pre-COVID, the S&P rose by over 30% in 2019 and ended the year on a very strong note, which continued until COVID-19 struck in March 2020. The stock market, while not the economy, is said to be a good barometer of the next two or three quarters. One thing to note, however, is the Google, Amazon, Apple, Facebook, and Microsoft portion of the S&P 500—the portion that makes up about 20% of the market-weighted index—propelled the index higher with energy, banks, and pharmaceuticals, with consumer staples, etc., lagging behind. When you consider that, stocks expected a “not too hot, not too cold” year for the economy.
Therefore, with just a few more hours before the 2020 General Election, where voter turnout has already been staggeringly high and most polls showing a probable Biden win, if President Trump pulls another rabbit out of his hat and wins again, will we get euphoria in risk assets? Unfortunately, COVID-19 is making good on the promise of a second wave—a wave that is intensifying as we go to the polls. COVID-19 has become the major focus and issue to a majority of the electorate. This will dampen the possibility of a repeat of what happened in 2016 when Trump won. However, while a Trump reelection will not get a euphoric response, we do think that we can still get a positive response in the equity markets. Investors will try to look past the current conditions and see a receding of COVID-19, a massive amount of monetary stimulus, and no reversal of Trump Administration executive orders that rolled back regulation. A win by former Vice-President Biden will most probably get a tepid one, in our opinion. Soon we shall see!
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