For the second time this year, a major political event in one of the largest global economies seems to have completely taken the financial community by surprise. Despite almost all pre-election polls indicating a Hillary Clinton win, controversial Republican candidate Donald Trump pulled off a shocking victory in the U.S. election and will become the next president of the United States.
For British onlookers, it must have seemed like a case of déjà vu. Earlier this year, the British Brexit vote pulled off a seemingly equally improbable victory.
Both Trump’s election and the Brexit victory have the potential to be devastating for the economies of their respective countries. However, while the FTSE 350 sold off by more than 7.0% in the first two days following the Brexit vote in June, the S&P 500 was up more than 1.0% in the first two days following Trump’s election.
Where’s all the panic and volatility?
In the UK, the Brexit vote could have severely negative implications for the economy. HSBC analyst Simon Wells estimates that the Brexit could cut UK 2017 GDP growth in half from an estimated +2.3% to 0.8-1.3%. In addition, he believes currency depreciation will lead to out-of-control inflation and changes to immigration policy could generate labor shortages.
In the U.S., Trump critics argue many of the same consequences are possible. Back in June, Moody’s Analytics studied Trump’s policy proposals and concluded that they would lead to a “lengthy recession,” cost the economy 3.5 million jobs and hike the unemployment rate from under 5.0% to 7.0%.
A Tax Foundation report suggested Trump’s policies would add $10 trillion to the federal deficit.
Despite the similar unpredictability, uncertainty and potential negative consequences surrounding both the Brexit vote and Trump’s election, there is one key difference that is likely keeping U.S. markets afloat. The Brexit vote was a direct vote on policy. Citizens voted for a change in UK law, and they are getting it. While not legally binding, directly defying a referendum vote would likely be political suicide for UK Parliament members.
On the other hand, a U.S. vote for Trump is not necessarily a vote for all of Trump’s proposed extreme policies on immigration and international trade. In fact, some analysts and even Trump supporters expect many of his proposed policies will never be implemented. Republican fundraiser and Trump supporter Anthony Scaramucci said back in June that some of Trump’s more troubling policy proposals are simply “starting points” in an anticipated negotiation with Congress and/or other nations.
In other words, even with a Republican Congress, Trump likely won’t actually be able to do a lot of the things he has said he would do.
The market seems to be assuming that any of Trump’s particularly harmful immigration and international trade promises won’t extend beyond campaign rhetoric and make it to actual law.
Finally, the FTSE’s subsequent bounceback after its initial Brexit sell-off has given U.S. investors even more confidence that a surprise political shock doesn’t necessarily mean that it’s time to panic.
Disclosure: the author holds no position in the stocks mentioned.
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