Shares fell on global stock markets by a breathtaking trillion dollars in recent weeks as investors sought to reduce their risk exposure in the final phase of a turbulent U.S. presidential election.
At the same time, Wall Street’s VIX fear barometer rose above its long-term average. And gold, the traditional haven of anxious investors, was also in demand.
But which direction will financial markets go after the U.S. election? Handelsblatt takes a closer look at how demand for different asset classes might develop according to the possible outcomes.
In what continues to look like the most likely result of a victory by the Democratic candidate Hillary Clinton – stocks would know only one direction in the short term: upward. Experts expect share prices to easily recover their recent losses in this event.
The former U.S. Secretary of State could be a blessing for stock markets in the mid-term as well. She has announced an infrastructure program totaling $275 billion, and wants to double the nationwide minimum income to stimulate consumption and assure the stable policies so cherished by the markets.
Companies involved in wind and solar power stand to benefit, because Ms. Clinton wants to promote renewables. And her plans to improve and extend health care could boost hospital operators.
But things could get uncomfortable for financial and pharmaceutical stocks. If the Democrats take over the majority in the Senate from the Republicans, then Ms. Clinton could be forced by the left wing of her party to adopt a tougher stance toward these two sectors – with devastating consequences for their share prices.
Things look quite different in the case of a Trump victory. If the Republican defies the forecasters and wins, analysts at Barclays anticipate an immediate decline in the S&P 500 of between 11 and 13 percent. “It could disrupt the markets the way the Brexit referendum did,” says Paul Richards, president of Medley Global Advisors, which offers consulting services to hedge funds and other institutional investors.
Among the few beneficiaries of a Trump win could be financial institutions, construction firms and coal producers, because he has announced a deregulation of the financial industry, an infrastructure program of up to $1 trillion and turning away from renewables.
A Trump victory could likewise bring sharp reactions on the bond markets. “We could see a grave revaluation on the bond markets,” says George Magnus, an economic adviser at UBS.
With regard to U.S. Treasury bonds, whose 10-year certificates currently earn a little less than 1.4 percent, experts reckon with rising prices and falling yields, because these securities are considered to be safe and traditionally serve as a haven for nervous investors.
On the other hand, a survey by BMO Capital Markets shows a Clinton victory bringing a slight rise in returns by five base points.
But the future monetary policy of the Federal Reserve will have a greater impact on bonds than will the American elections. A further rise in the prime rate in December would boost returns and dampen prices.
In contrast to state securities, risky corporate bonds are not considered a safe haven in times of crisis. Here share prices and returns can be expected to move in tandem with the stock markets. Experts reckon with falling share prices after a Trump victory, especially with respect to debt-laden (and hence lower-rated) junk bonds.
A Clinton victory would bring only minimal movements.
Whoever fears global catastrophes with respect to the economy or politics has always bought gold. For most investors, a Trump presidency would amount to at least a medium-sized catastrophe, which means the gold price can be expected to rise dramatically if he wins. In recent weeks the precious metal’s value rose with each bit of positive news for Mr. Trump – reaching more than $1,300 per ounce.
On the other hand, a Clinton victory would depress the price of gold – at least in the short term. That’s because the price depends more on fundamental economic data and central bank policy.
When the FBI announced on Sunday that it will not resume investigations against Ms. Clinton in the email affair, the Mexican peso rose by as much as 3 percent in relation to the dollar. The currency there has been reacting sensitively to developments in the presidential campaign, mainly due to Mr. Trump’s anti-Mexican policy plans. If elected, Mr. Trump wants to cancel the NAFTA trade agreement, impose tariffs on Mexican products and erect a wall as high as 30 meters along the American-Mexican border to keep out illegal immigrants.
So if Mr. Trump wins the election, analysts at Société Générale forecast a fall in the peso by as much as 17 percent. If Ms. Clinton enters the White House, a further rise in the Mexican currency is expected.
The situation is more complicated with regard to the U.S. dollar. A Clinton victory would initially cause the dollar to rise, because the prospect of stability would increase the likelihood of the Fed’s raising the prime rate in December.
If Mr. Trump gets the most Electoral College votes, the dollar would be weakened in the short term because investors would consider a rise in interest rates to be unlikely. But in the subsequent twelve months, the dollar could quite possibly rise because Mr. Trump intends to stimulate the economy with tax reductions and a massive infrastructure program. Furthermore, he wants to force the Fed to raise interest rates more quickly – which would likewise give the dollar a boost.
Daniel Schäfer is head of Handelsblatt’s finance pages. To contact the author: firstname.lastname@example.org