While the market has had its share of bogeymen to worry about so far in 2016, mostly along the lines of the "Four Cs", namely China, Crude, Credit and Currencies, it has so far largely ignored one letter: the Big D, for Donald, as in how would a Trump presidency affect the market. And, as Reuters writes, it is time for Wall Street to add "the juggernaut that is Donald J. Trump to the list of what-ifs that is worrying Wall Street."
The kneejerk, conventional wisdom reaction is that the non-establishment outsider would be a big risk for stocks: "a growing realization that the unpredictable New York real estate developer is in a position to win the Republican nomination and then battle Hillary Clinton for the White House in November's election has caused some investors to sell U.S. stocks. They fear having such a wild-card president could trigger trade wars, hurt the economy and add a lot of market volatility."
AS Doug Kass notes, "as the market rarely feasts on lack of predictability - Trump represents a nightmare for investors this year." Kass said last week that he was adding to his existing short bet on the U.S. stock market in part because of Trump's increasingly strong position in the race.
The problem is that it is difficult to pigeonhole Trump's market policies: according to Reuters, "his statements on business and Wall Street don't neatly fit into one ideological worldview, but if anything, they are seen as isolationist in a globally connected world. He can also suddenly pick on businesses over various issues, such as his call for a boycott of Apple’s products after the tech giant refused to help the FBI unlock the iPhone used by one of the San Bernardino shooters."
It's not just the usual "year eight" of the presidential cycle jitters when the market tends to underperform: "The election this year is the height of uncertainty," said Phil Orlando, a senior portfolio manager and chief equity strategist at Federated Investors in New York, which manages $351 billion. He said political concerns - personified by Trump's emergence as a frontrunner - are one of the main reasons why he began reducing equity exposure in mid-January.
Others are concerned about Trump's "lack of substance" such as Dave Lafferty, chief market strategist at Natixis Global Asset Management who said that "Trump has been light on policy substance so it’s very difficult for the markets to handicap." He expects market volatility to rise if Trump extends his lead in Tuesday’s elections.
Then there are fears about Trump's domestic policies. Some investors are particularly concerned about Trump's nationalist rhetoric, saying it is potentially destructive to a global economy that is already struggling. If it reduces trade flows then it could also hamper U.S. and global growth and hurt U.S. company profits.
As Trump has noted several times during recent speeches, he proposes labeling China a currency manipulator and ending what he calls China's illegal export subsidies and theft of U.S. intellectual property. He also wants to penalize companies who move jobs from the U.S. to Mexico by hitting them with high tariffs if they want to export back to the U.S., as well as build a wall at the Mexican border to prevent the flow of illegal immigrants. Then again considering the US just announced a 266% duty on Chinese steel imports, it may be that Obama is merely frontrunning Trump's policies.
In response, Trump’s spokeswoman Hope Hicks said in an email to Reuters that the same crowd criticizing the Republican Party's top candidate had been responsible for causing the last worldwide recession and economic meltdown in 2007-2008.
"They have zero credibility," said Hicks. "Mr. Trump will restore confidence to the global markets by ending runaway spending and borrowing, restoring trade balance and fairness, and bringing wealth to America's middle class."
One can't say that he is wrong.
What is surprising, is that among his other proposals, Trump would bring forth some very market-friendly policies: plans include ideas that traditionally come from Republican candidates, such as lowering the corporate tax rate, simplifying the tax code, and as his web site puts it, cutting the deficit through "eliminating waste, fraud and abuse" and "growing the economy to increase tax revenues.”
"I think markets will like Trump on the taxes issue since he favors lower rates and a permanent change in repatriation rules," said David Kotok, chairman and chief investment officer at Cumberland Advisors.
On the other hand, some on Wall Street are worried that Trump's plans to do away with the so-called carried interest tax loophole - which gives hedge fund and private equity managers preferential tax treatment on much of their income - would prompt more selling if he begins to climb in national polls against Clinton.
Then there are questions about Trump's fiscal policies. David Ader, chief government bond strategist at CRT Capital Group in Stamford, Connecticut, said Trump's history raises questions about his ability to run an organization as unwieldy and complex as the government. The businessman has in the past filed for Chapter 11 bankruptcy protection for the Trump Taj Mahal casino and Trump Plaza Hotel. Ader says the uncertainty would cause investors to flock to safe-haven U.S. Treasuries should Trump take office. "It's one thing to run casinos that have gone bankrupt, it's another to run a country and its foreign policy," he said.
To this one can respond that if the Fed is unsuccessful at inflating away the debt, default would be the next option (if not very likely), and someone who is familiar with balance sheet restructurings, such as Trump, is precisely what America needs.
However, that may not be enough for Todd Morgan, senior managing partner at wealth management firm Bel Air Investments Advisors in Los Angeles, who is already taking action: he said that the increasing likelihood that Trump will be the Republican nominee is one reason why he has raised cash in some client portfolios over the past four months. He would likely sell more if it looks like Trump will win the general election, he said.
"It's like a scale and you keep dropping more weights on the balance everyday, and the political uncertainty is becoming a bigger and bigger weight," he said.
Some are far more optimistic, and as Carl Icahn told Neil Cavuto last night, "I do believe Donald Trump is what this country needs right now."
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But the best and most pragmatic response came from DoubleLine's Jeffrey Gundlach, who said that Trump has a history of being ”comfortable with a lot of debt and leverage," and that won't impede him from spending heavily. He said he believes Trump’s pledge to spend heavily on the military makes defense stocks a good investment play.
In other words, for all the rhetoric and all the bluster, at the end of the day, America under president Trump will be... very much the same.