The campaign and result
After one of the most divisive and rancorous campaigns in US political history, we now know who will become the 45th President of the United States. The two candidates vying for the Presidency, Hillary Clinton and Donald Trump, were two of the most unpopular and polarising ever to have done so with levels of dissatisfaction for both candidates at unprecedented levels.
Whilst national polls remained tight, the first-past-the-post system of electoral college votes – whereby votes are allocated to each State based on their population size – suggested Hillary Clinton had the edge (even as the polls closed); the ingrained advantage that the Democratic Party nominee has in US Presidential elections gave her 247 electoral college votes amongst safe or Democrat-leaning States versus the Republican Party’s 206. The handful of so called ‘swing’ States – namely Ohio, Iowa, New Hampshire, Colorado, Florida and Nevada, amongst others, were expected to decide the election and who would take the White House. Opinion polls and demographics amongst these ‘swing’ States also gave the Democratic candidate the advantage. It is perhaps therefore a shock to this electoral ‘rigged system’ (as Donald Trump has referred to it) that he was victorious.
It has been easy during this acrimonious Presidential campaign to overlook the Congressional elections, whereby all 435 seats in the House of Representatives, and 34 of the 100 seats in the Senate, were up for re-election. The outcome of these Congressional elections is crucial, as they will determine the extent of the power and control that President Trump will have at his disposal, potentially constraining his ability to implement some of his more partisan proposals. However, his surprise Presidential win has helped him sweep Congress too, potentially giving him significant power to legislate.
Immediate market impact
The potential for turmoil following a Donald Trump win is significant. With markets having priced in a Hillary Clinton victory, most commentators are forecasting a strong sell off in US equities, as well as a Dollar rally verses selected Emerging Market currencies and the Canadian Dollar; the Mexican Peso, which has been used as an election bellwether through much of the campaign is expected to be one of the hardest hit, with Donald Trump’s inflammatory rhetoric towards Mexico and anti-free trade stand jeopardising the trading relationship with the United States. The Swiss Franc, the Japanese Yen and Gold, meanwhile, are likely to rally, as investors seek ‘safe-haven’ assets in light of the increased volatility.
Longer term market impact
Whilst his promise of tax cuts would boost economic growth, his proposals to simultaneously increase infrastructure and defence spending would increase the budget deficit and potentially increase borrowing costs. His anti-trade rhetoric – threatening the unilateral withdrawal from NAFTA, which would allow the government to impose tariffs on imported goods – would likely hinder US growth prospects and potentially spark a trade war. Furthermore, his anti-immigration policies would likely prove detrimental to economic growth. However, it remains to be seen whether House Republicans would support such extreme measures, with the US electoral system’s wide range of checks and balances likely to prevent such divisive actions being undertaken.
As we saw with the EU referendum, market reactions can reverse quickly, so short term positioning could prove counterproductive. The outcome of the Congressional elections and the dynamic between the two pillars of government are likely to best provide investors with indications as to the direction of travel for the US economy going forward. Despite having control of both the executive and the legislative branches of government, his lukewarm support by establishment Republicans suggest it won’t necessarily be plain sailing.
Whilst we should be prepared for significant volatility following Donald Trump’s win, in the longer term it will be Congress that holds the key to how markets react to the Presidency itself.