Trump and the markets
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.
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30. September 2016 at 08:02
Very good post.
Except for your offhand, passing comment about Trump’s racism. Don’t do this. It is only true under the new, expanded definition of racism that covers almost everybody. You are old enough to know that actual racism has declined a lot during your lifetime, yet the accusation is more and more of a go to move from the left, which is not at all helpful.
30. September 2016 at 08:04
Moderate chance of President Trump causing true bipartisanship in both Houses, as both parties recoil from him.
Also good chance of the traditional limits on the executive being reimposed.
Every cloud…
30. September 2016 at 08:06
“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.”
-If he decreases the risk of nuclear war from .5 to .1% (due to his policy of getting along well with Russia and his great deal-making), I’d consider that a huge positive, but the market would not care at all.
See, most of you college-educated care nothing whatsoever about policy. After some thought, I suggest you all be barred from ever voting, that the universities should all be defunded, and that America must be Made Great Again. The will of the people must triumph.
“I think if Rubio or Bush were running against Hillary a GOP victory would be worth more like 4% to 5% this year.”
-Ah; but they actually would knowingly and massively increase the risk of nuclear war. Are you comfortable with that?
30. September 2016 at 08:08
@Brian
-Sumner is far less useful as an observer of culture and politics than an economist. He basically adopts his views on the former two largely from his surroundings. And his surroundings ain’t good.
BTW, fortunately, it was I who made the (brilliant) first comment on the (terrible) post
http://slatestarcodex.com/2016/09/28/ssc-endorses-clinton-johnson-or-stein/
30. September 2016 at 09:04
#4) A counter-argument might be that Reagan-Thatcher-Volcker-Greenspan had an influence even beyond their own nations’ borders. Other countries do use US policy as a baseline model for themselves sometimes. Of course, this counter-argument doesn’t change the silliness of moving to other countries.
I would agree, though, that Reagan-Thatcher-Volcker-Greenspan probably reflected, rather than caused, the global neoliberal and anti-inflation trends.
30. September 2016 at 09:14
Have to disagree that Volker and thatcher/reagan were not important in those developments. Maybe those things happen without them, but we do not know that.
Its tough to escape the neighborhood you live. The other countries which moved in the direction of Thatcher/Reagan lived in our neighborhood. Other European economies that follow a lot of the policy that the US moves to.
Witness Argentina that at one point looked like they could be a major country, but fell into the traps of the rest of Latin America.
30. September 2016 at 09:16
Very conventional and actually terrible post by Sumner. Keep in mind the German business class thought the same thoughts as Sumner and believed they could work with Hitler. They were wrong.
30. September 2016 at 09:25
Note the parallels between Trump, a failed businessman, and Hitler, ignorant of business but knowing how to flatter. And he’s duped Prof. Sumner as well. Bullock’s “Parallel Lives” on Hitler after WWI (1918-23): “Hitler made several presentations to business circles in Bavaria but with very limited success. More important was an introduction to the influential National Club in Berlin which he owed to a friend of Dietrich Eckart, Emil Gansser. Twice in 1922 Hitler was invited to address the Club, which consisted mainly of army officers and senior civil servants as well as a number of businessmen. He appears to have put his case well, avoiding reference to the anti- capitalist clauses of the NSDAP programme and laying stress on its anti- Marxism. He at least attracted the enthusiastic interest of one of Germany’s best-known industrialists, Ernst von Borsig, head of a famous but no longer leading engineering firm. Borsig certainly provided the NSDAP with funds but failed to raise money from other industrialists to enable Hitler to set
up a branch headquarters in Berlin.“
30. September 2016 at 11:02
Brian, I’d guess that 90% of the time a leftist accuses a conservative of “racism” it’s a bogus charge. With Trump it’s 100% accurate, and not even debatable in my view. The list of examples is as long as my arm (I have 36 inch sleeves). One or two could have been taken out of context, but not all.
Ray, Yes, Trump has duped me into supporting him. How could have have been so stupid?
30. September 2016 at 11:24
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.
30. September 2016 at 11:42
Scott — Isn’t the big issue here the impact of expected Trump tax cuts on the dollar and the Fed? If Trump cuts the corporate rate to 15% and the top personal rate to 33%, wouldn’t the dollar soar on the expectation of stronger GDP growth and a higher Fed Funds rate?
My concern is that we get a replay of 1982-90 or 1997-2002, when tax cuts led to a plunge in gold (ie dollar strength) and both commodities and EM cratered. At the same time the Nasdaq would rise, as it did in the late 90s, when nothing else worked …
30. September 2016 at 12:13
Except for your offhand, passing comment about Trump’s racism. Don’t do this. It is only true under the new, expanded definition of racism that covers almost everybody. You are old enough to know that actual racism has declined a lot during your lifetime, yet the accusation is more and more of a go to move from the left, which is not at all helpful.
Mr. Donohue, the Mercatus crew are conventional academics and deferential to the nonsense conventional academics subscribe to if they recognize it as nonsense at all (see the moderator’s chatter about ‘sexism’ and ‘discrimination’). You can see this in his reply to you, which is juvenile.
30. September 2016 at 12:15
Note the parallels between Trump, a failed businessman,
The Trump Organization has 22,000 employees. You’ve got teenage hookers.
30. September 2016 at 12:44
Art Deco, you are so wrong about Trump. He is not only a racist, he believes he possesses superior genes. You knew that right? He believes it is because of his German blood.
The man is a menace, and so are you for acting like he isn’t. http://us.blastingnews.com/news/2016/09/donald-trump-brags-about-having-superior-genes-german-blood-in-shocking-video-001152527.html
30. September 2016 at 13:16
I finally took the positions which bet on Trump’s win on prediction market
https://hwasshoi.wordpress.com/2016/09/30/less-is-more/
30. September 2016 at 13:18
ONce the video of Trumps Aryan superiority goes viral, you will lose your bet, Wasshoi. http://us.blastingnews.com/news/2016/09/donald-trump-brags-about-having-superior-genes-german-blood-in-shocking-video-001152527.html
30. September 2016 at 18:43
“Although it’s dangerous to argue from a price change, Dow futures did rise 1% during the debate.”
The market rose ~0.8% during the debate; all of that rise occurred during specific moments when Trump gave poor or rambling answers (as evidenced, for example, by the Luntz focus group).
Betting markets may have only fallen 5% for Trump during the debate, but Nate Silver’s odds fell almost 15%. It’s possible (gasp), that the S&P futures are more liquid and more reflective of big money opinions, whereas the betting markets are small and were waiting on poll results. Not very EMH (sorry Scott), but plausible. Also plausible is that Trump’s Twitter rants have continued to damage his electability post-debate.
Either way, lets say -10% for Trump odds is worth 0.8% for the S&P. That suggests people are valuing Trump at -8% for markets vs Hillary, which sounds about right given that Brexit had a similar effect.
Ok, ok, but the market bounced back from the Brexit panic (after shocked elites were done dumping). Maybe the -8% for Trump would bounce back, too (sorry Scott, again not very EMH). Anyway, the direction of the bet is crystal clear, and there is big money betting the magnitude of the Trump selloff would be 5-15%. Pick your assumptions carefully though.
30. September 2016 at 20:19
Brian Donahue – so essentially your argument is, as long as people aren’t so racist that they think it’s appropriate to chase non-violent protestors with dogs and whip them or lynch them because they are black, why should we be concerned? If, for example, people claim not to be overtly racist but they’re far less likely to hire equally qualified black job applicants (http://www.nber.org/digest/sep03/w9873.html), we should just say, “Stop complaining! You should be thankful you’re not being lynched”?
This is preposterous. Things are better than in 1865 or 1930 or 1960. Of course. But racism is still a major social problem in America.
30. September 2016 at 21:25
Randomize’s comment is just self-serving solipsistic punditry. OK, he believes in his own mind Hillary did better. But that is different from the market’s judgment.
30. September 2016 at 22:43
“Mexico dropping a nuclear bomb on Monterrey. Bottom line, a VAT is trade neutral.”
Hey, that’s my hometown. Don’t give ideas to the Mexican feds. They have always been onto that kind of stuff.
1. October 2016 at 07:32
Randomize, I added an update.
Kgaard, That’s possible although these things are very hard to predict.
Steve, Reasonable comment, but I view the betting markets as superior to Nate Silver’s odd, which jump around too much.
1. October 2016 at 10:22
“I view the betting markets as superior to Nate Silver’s odd”
No, I agree. S&P betting > prediction better > Nate Silver
The issue is dividing two small fractions: Delta_S&P / Delta_Trump,
especially when there is conflicting evidence of Delta_Trump in the post-debate fog, where #TrumpWon people are vocalizing while polls are not yet in.
I am just asserting -8% as a good “Trump Crash” estimate, rather than -16%, since there is evidence Trump’s debate performance was far worse than initially perceived, and it is better to be conservative when dividing by a small and statistically noisy fraction.
1. October 2016 at 10:29
My other point: markets are good at anticipating liquidations, like a fund going bust.
Well, a surprise Trump win would be like a giant progressive hedge fund going under. Given the rhetoric this season, you’d have people (even Ivy profs) calling up Vanguard saying “get me the hell out”. A Trump Crash would be a certainty (just like the Brexit crash). The question is what happens after. I’m not saying Trump wouldn’t be bad, I’m just saying the initial negative judgment is more certain.
1. October 2016 at 11:33
This is preposterous. Things are better than in 1865 or 1930 or 1960. Of course. But racism is still a major social problem in America.
No, racism is a minor social problem in this country. However, discourse about racism is useful to certain self-aggrandizing segments.
1. October 2016 at 18:02
Scott says: “I’d guess that 90% of the time a leftist accuses a conservative of “racism” it’s a bogus charge. With Trump it’s 100% accurate, and not even debatable in my view.”
The fallacy here is obvious. It consists in confusing being a sh*tty human being with being a racist. Trump uses any insults that are to hand to hurt people who stand between him and what he wants. The idea that his insults express his considered contempt for a particular race is laughable — he is contemptuous of the human race.
1. October 2016 at 19:11
Ian, When I say a politician is a racist I mean they are acting like a racist. You might be right about his private opinions. I don’t know and don’t care what Trump privately believes—I judge him by his public behavior.
1. October 2016 at 21:22
Trump’s video is of his public behavior. He says he has the master gene. He says his German blood is what gives him this power of the master race. You should all look at the video, because it is chilling.
I am amazed that baby boomers cannot understand the danger of a master race theory, when our WW2 fathers and grandfathers fought and died to prevent the master race champion, Adolph Hitler, from taking over the world.
I am shocked how America has become tolerant of the concept of a master race.