Having gone through a short but intense course on capital markets over the month I think I have a little bit more understanding of how politics, policies and markets are correlated. The following is a quick and simple summary of my understanding of how Donald Trump’s victory affected US as well as other major economies around. Disclaimer : I am a finance noob taking out 15 minutes to write a post amidst the insanity that is called first year in B-School.
Trump’s take on income tax, carbon tax and trade will affect many countries, but the basic problem the market is currently dealing with is the uncertainty about what he is actually going to do. During his campaign, he spoke a lot about building a wall, getting illegal immigrants out of US, stopping visitors from Islamic countries, but we are yet to find out whether it was a way to fuel populist sentiment and instigate a specific set of people and to get their votes.
It is incredibly interesting to see how the market reacted to his win. The vast majority of the people did not expect him to win, even the trump family looked pretty shocked to see him win!
Barclays had come up with a study that said that if trump wins, the stock market will fall by 10-13%, but that’s not what happened! Let’s look at what did –
On Wednesday, the futures market started falling and the market still could not make up its mind. But soon it realized that things are not that bad. The futures market picked up and went up 1.5% the same night.
This goes to show that people in-fact believe that Trump is good for the US economy in the long run because he is fueling infrastructure spending by lowering taxes, which will increase possibility to stimulate the economy and grow the GDP. Cutting out outsourcing can fuel employment for citizens. Basically, not all of his policies are value destroying to the US economy.
Also his acceptance speech made a huge difference, in which he sounded very different form how he sounded during the campaigns. He said he and Hillary had an amicable exchange and we will work together to make America great again. Maybe his softer tone is an indication of how his presidency might be rather than what we saw during the campaigns.
The temporary drop in the market was probably also an overreaction, and that’s when some people saw that it was a great buying opportunity. Also the factor that a number of firms sold a lot of their holdings and were sitting on a lot of cash, but once they saw the market was back, they put it back into the market, and the margins pushed the prices a little higher.
Obviously, Trump doesn’t have a king’s role. The senate has its system of checks and balances and is reasonably smart to not give the president the ultimate power.
Yields: The yields on govt bonds went from 1.7% to 2.1%, which was such a huge jump! This was because the market expected the fiscal policy to be lose. Trade barriers and tariffs, means people in the US will be paying more for stuff they got from china, and this will push inflation higher. There could be a possibility that people also felt hat government would not be able to pay back, and in general the uncertainty went up and hence the risk went up so yield went up.
Currencies: The Japanese Yen and Brazilian Real fell; most developing countries’ currencies fell. Basic reason is trade, if trade goes down with these countries, there are implications. Mexico – Mexico depends on trade with US, so Peso fell, Mexican stock markets feLL by 9%
The volatility index : It actually fell! Now that the big part of The uncertainty of who is going to be the president was resolved, the short-term volatility actually fell.
Implication of the Dodd-Frank act – the purpose of which was to enforce regulations on the banks and it took a number of years but was finally passed- But Trump wants to repeal it. The banking stocks were one of the biggest beneficiaries of the repeal, which is why the bank stocks went up. I think it’s terrible to not have the act personally.
If we look deeper into the industries. Within the market there was massive difference in companies performances.
- Mylan the makers of Epipen, who got into trouble of jacking up the prices of the Epipen drug were concerned about regulations, but with Trump as president these problems are gone, so stock value went up.
- US Steel, won’t face competition from china so stock value went up.
- Constellation Brands, makers of the Mexican beer Corona, stock prices went down.
- Caterpillar, makers of heavy equipment – prices went up because there will be a spike in infrastructure spending.
- Prices of dirty energy went up, while makers of clean energy such as Tesla went down. Defense companies such as Lockheed went up.
- Smith & Wesson – manufacturers of guns – went down 16%! This is because people are not worried about Hillary taking their guns away, they can buy guns anytime later if not now. When Obama came into presidency gun sales went up for the period of time.
After 9/11 this is probably the biggest of a single event having such a profound impact on all asset classes. During 9/11 all the stocks fell, but this case is a lot more complex. Basically, I notice that all regressive industries that one may not want to do well are doing well.