I probably have pretty much the same (negative) view of Trump as does Tyler Cowen. But I’m not particularly surprised by the stock market evidence that Tyler presents, suggesting that the election of Trump would not have much impact on the market. Tyler points out that in past elections the markets respond to a GOP victory by rising 2% or 3%, but this time there seems to be no effect. So Trump is less positive for the market than usual, but not a negative.
[Update: Randomize left the following comment:
Although it’s dangerous to argue from a price change, Dow futures did rise 1% during the debate. Given the way Trump performed, it may be reasonable to say that the market prefers Hillary.
Perhaps a bit less than 1%, but that’s still important, as the odds of Trump winning fell by only 5% during the debate. We may need to get closer to the election to get an accurate take on the market reaction.]
Here’s my take on it:
1. The usual 2% to 3% bump mostly reflects expected tax changes, with regulation also playing a modest role. I think markets are factoring in the same sort of plus for Trump as they always do for a GOP candidate. Trump is likely to cut corporate taxes, and reduce some regulations.
2. Hillary is not worse than average, considered as an individual, but leads a party that has swung very sharply to the left. So she would govern very differently than Bill Clinton. For that reason, I think if Rubio or Bush were running against Hillary a GOP victory would be worth more like 4% to 5% this year. This is also because the GOP is likely to retain control of Congress if they win the Presidential election.
3. Offsetting that 4% or 5%, Trump’s views on trade are a big negative. His views on government spending are about equally reckless as Hillary’s. His views on immigration are only a mild negative, as the markets don’t expect him to expel the illegals. His racism is obnoxious, but not something the stock market cares about. If he increases the risk of nuclear war from 0.2% to 0.3% (due to his immature and reckless personality), I’d consider that a huge negative, but the market would not care at all.
4. People tend to greatly exaggerate the impact of a president. Virtually all countries moved in a neoliberal direction after 1980, not just Reagan’s America and Thatcher’s Britain. Almost all countries got inflation under control in the 1980s and 1990s, not just Volcker and Greenspan. Individuals are not as important as you think. People who talk of moving to other countries are just silly.
To conclude, the market thinks Trump would give them a better tax system, as with any other GOP candidate. The reason he would not provide the normal 2% to 3% GOP bump is that some of his other views are worse (for the stock market) than average for a GOP candidate. As I keep saying:
“There’s a great deal of ruin in a nation”
(A concept that also applies to Brexit.)
PS. Evidence as to how markets actually performed during GOP administrations (poorly) is of course irrelevant, for standard EMH reasons.
PPS. Tyler has a post on VATs and trade, which makes things way too complicated. The question is whether a VAT favors exports and discourages imports relative to an ordinary domestic consumption tax. Navarro and Trump say (or imply) it does, which is an EC101 level error (contrary to Tyler’s claim). Yes, it may boost exports relative to Mexico imposing an income tax, just as it boosts exports relative to Mexico dropping a nuclear bomb on Monterrey. Bottom line, a VAT is trade neutral.