Trump Wins - Now What Happens to U.S. Markets?

Trump Wins - Now What Happens to U.S. Markets?

9 November 2016, 16:26
Mohammad Soubra
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Trump Wins - Now What Happens to U.S. Markets?



 

Talking Points:

-Donald Trump shocked the world by winning the U.S. Presidential Election, and that shock initially showed in sell-offs in both the U.S. Dollar and the S&P 500. But normalcy was quickly restored and price action in both of those markets came screaming back. As of this writing, the U.S. Dollar is virtually unchanged on the day and the S&P is down approximately 28 handles from yesterday’s close.

 - The initial response to Trump’s win was very similar to Brexit. But follow-thru price action has been very different, as Brexit saw risk aversion drive deeper for two days; while risk aversion has lasted only a few hours on news of a Trump win.

- While emotions have run-high around this election cycle, the simple fact of the matter is that the Federal Reserve has been a more pertinent driver of prices than any politician; and that is unlikely to change. IF we do get a Trump/risk-off scenario, this simply opens the door for more loose and dovish monetary policy, or perhaps even more QE, similar to how the Fed has talked about managing down-side risks in the recent past.

 

The U.S. Presidential election was one for the ages, full of drama until the very end and even a little bit after. By 2:30 AM Eastern Time, Secretary Clinton had conceded the election to the winner, President-Elect Donald Trump.

As we discussed yesterday, the Trump scenario came-in to markets very similar to what we saw around the Brexit referendum. Coming into the vote in both cases, polls were reflecting a seemingly market-positive outcome in expecting the status quo to continue (remaining in the U.K. for Brexit, and sticking with a Democrat President in the U.S.). But as that status quo was flipped on its head progressively throughout the night as voter numbers swung more heavily to Donald Trump, price action began to look more and more threatening. The S&P began its descent just after 8PM, as polls began to come in from states on the East Coast. By 10 o’clock the S&P was already down by 100 points. The U.S. Dollar mirrored this price action, getting hit starting at around 8 o’clock and selling off further as a Trump win became more likely.

But as we’ve noted – it’s unlikely that sell-offs continue to develop in both of these markets. The initial selling seen in both of these markets was likely shock-factor after a surprising vote, much as we saw with the Brexit referendum. But also like we saw with Brexit – a Central Bank with loose and willing monetary policy can offset a considerable amount of risk. And the Federal Reserve has said numerous times that they aren’t political and don’t even discuss politics, so logically a Trump win could end up as more of an equity-market positive. If risk-off remains in the wake of last night’s elections, the Fed has the option of not hiking in December and cutting expectations for hikes in 2017 (very similar to what we’ve seen throughout 2016).

The net result of all of this pandemonium has been a Doji on the U.S. Dollar daily chart, and while it would be simple to call this indecision candlestick while saying that this reflects the world’s opinion of Donald Trump, that wouldn’t really be accurate as price action has told a far different story. For that, we need to go to a shorter-term chart (2nd below). 

 

And on the chart below, we’re zooming in on price action to see the dip that came-in to the Greenback as a Trump presidency became more likely, leading to a strong zone of support that preluded a bounce higher, to almost right back to where we started.

 

Moving forward, the driver on the Greenback will likely be the driver that we’ve all come to know so very well: The Federal Reserve. If the Fed is still planning to hike in December, the U.S. Dollar will likely continue to strengthen as there simply aren’t many other major economies looking to tighten monetary policy right now. This could, of course, attract capital flows into the Dollar which could bring on even more strength down the road. And this will likely be bad for stocks, but it’s pretty much the same situation that we’d be looking at in a Clinton scenario.

Speaking of stocks, we saw some selling there as well last night, and again this was similar to albeit more tame than what was seen around the Brexit referendum. The S&P fell from a pre-results high of 2156 to a low of 2032 before deeper losses were halted, waiting for the open of U.S. markets the following morning. But in the middle of the night, buyers returned and prices began tilting higher. After what even many of Mr. Trump’s most ardent critics considered a rational and balanced pro-Business speech, calm returned across global markets and, on the S&P we’re back above the weekly open price of 2084.

 

What Does Donald Trump Mean for U.S. Stocks?

You’re likely going to be seeing numerous versions of the same question worded in a bunch of different ways in the coming weeks. And frankly, the Federal Reserve is probably a lot more deterministic of U.S. equity price action than what Donald Trump may do in his first few years in office. Fiscal policy takes years to transmit into the ‘real economy’, while monetary policy is designed to show up fairly quickly. And because of various failures in fiscal policy around the world, monetary policy has become the stand-in replacement, and that’s still the case today as the Federal Reserve has posed but one single rate hike in the past ten years.

So, while emotions might be ruling some very smart people’s better judgement in the coming days, as long as the Federal Reserve moves towards consistency and transparency, similar to how they have over the past eight years, normalcy can be restored fairly quickly, and markets’ attention can be re-averted back to Central Banks, much as we’ve become accustomed to over the past nine years. 

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