How will Wall Street react to Trump-Clinton debate?
U.S. equities finished last week on a down note after excitement over the Federal Reserve’s “no hike” policy decision on Wednesday was replaced by a mixture of apprehension and fear ahead of tonight’s Super Bowl-size first presidential debate between Hillary Clinton and Donald Trump.
With the polls neck-and-neck between two candidates who couldn’t represent a more divided vision of America’s future, the outcome of the 90-minute face-off is critical to what finally happens in November. Areas in which their respective plans will have an impact include monetary policy, energy, health care, trade policy, immigration and more. And all will have an effect on the course of corporate profits and interest rates in 2017.
So the debate is a clearly a big deal given its possible impact on the final voting. And markets are already starting to price the election in: As Trump has closed in on Clinton’s poll lead, the Mexican peso has plunged on fears about tighter trade terms and “the wall.”
Should Trump end up as the victor, here are a few market areas to keep an eye on, and should Clinton win, just reverse the direction of the impact.
A caveat: As things stand now, a Clinton victory is the base-case scenario (with 58 percent odds, according to Nate Silver’s FiveThirtyEight). Moreover, according to the team at SentimenTrader, so-called “Smart Money” hedgers have moved to a near-record long position in the peso -- a real-money bet that Trump won’t win.
Market overall
If Trump emerges victorious, we’d move one step closer to what Wall Street has widely cast as a 5 percent to 10 percent post-election sell-off as investors prepare for the Donald’s energetic nationalism. That would upend the bipartisan status quo in play for decades of incremental free-trade deals and calls for increased immigration.
Analysts at Societe General have recommended clients prepare for a surprise Trump win by considering trades that would do well in that scenario: Gold, the Japanese yen and volatility (via the CBOE Vitality Index and ETFs indexed to it, such as the iPath Short-Term VIX (VXX)). They’re all considered safe haven assets.
Over the medium to long term, there are arguments to support the case that both Trump and Clinton would be good for stocks in general.
Clinton would likely support current Federal Reserve Chair Janet Yellen’s aggressively dovish monetary policy, which has been a clear positive for stock valuations in recent years. Trump has said he doesn’t like Yellen and believes she’s politically motivated.
Trump also supports a significant overhaul of the business tax code, including large rate cuts. But Clinton wants to raise effective corporate tax rates (the rate they actually pay) by targeting loopholes like tax inversions (in which companies relocate their domiciles to lower-tax countries).
Energy
Oil traders and energy sector analysts have lately been preoccupied with the constant churn of rumors surrounding a possible OPEC-Russia supply freeze, but a Trump win on Nov. 8 would have an impact as well. As Societe Generale noted, Trump has promised to end all “unnecessary regulation” on the U.S. production of coal, crude oil and natural gas as part of his “America first” energy plan.
Clinton, on the other hand, has called for increased investment in renewable energy resources and a reduction in carbon emissions.
Investors would likely bid oil and gas stocks higher in response to a Trump win, ignoring the near-term implications of increased U.S. oil production (pushing oil prices lower) at a time when the global energy market is already oversupplied.
Banks
According to Morgan Stanley, banks could be hit hard regardless of who wins because both candidates have talked tough on topics related to Wall Street banks. Trump has discussed restoring the Depression-era Glass-Steagall Act that separated commercial and investment banking activities. Clinton has pushed for tougher enforcement of the Dodd-Frank financial reform bill (which Trump wants to repeal) and eliminating carried interest.
Health care
A Trump win would bolster biotechnology and pharmaceutical stocks given Clinton’s outspoken criticism of Mylan (MYL) and its price hike on EpiPens. She has called for the creation of a government oversight group to regulate price changes. That could have a big impact given the severity of price hikes in recent years that has propelled stocks in the industry: According to Morgan Stanley, of 269 branded drugs in its analysis, 117 have more than doubled in price since 2009 vs. a 12 percent increase in overall prices in the economy.