I have had a few clients and others ask concerning the market's possible reaction to the upcoming U.S. presidential election.
Specifically, what if Donald Trump were to win?
I will try to keep my political opinions relatively shielded and approach this from a professional point of view as much as possible. It is, after all, a fair question in light of some of the headline-grabbing comments he has used in the campaign so far.
The first thing we might take note of is how the market has reacted to him to date. Markets are all about expectations. The most successful market participants are those who are able to see what already happened, predict what might happen, and stir in carefully-allocated doses of risk.
So how have markets reacted so far to the potential of a Trump presidency? Not much.
At this point financial pundits are far more interested in such things as a potential Brexit, or a tiny upward shift in interest rates than which way the wind is blowing the Donald's hair. Sometimes (not always) it's almost like the market is the adult in the room.
One possible reason for the muted reaction could be that financial markets expect Mr. Trump to eventually lose to Ms. Clinton. If this is the case, watch for market jitters if Trump gets competitive closer to the election.
Another possibility is that markets know that, even if he were to win, that there are sufficient legislative and constitutional constraints on his ability to implement some of his more outrageous ideas.
Our American friends are, after all, electing a president, not a king. There are robust balances of power in the U.S. house, senate and judiciary, not to mention the international political and economic forces which shape the financial world we live in. The system is messy, but overall it works.
Another constraint on Trump is that his own presumptive party is probably less likely to fall in line to support a president Trump on proposed legislation than they were previous Republican presidents. The concept of issue-by-issue voting, as opposed to party-disciplined voting, is a long established tradition in the country to our south.
At the best of times, Republican representatives are about as compliant as a herd of squirrels. The party, and indeed the nation itself, is not an island. And this is a good thing.
If you want proof that markets don't take him seriously yet, consider something Mr. Trump recently said regarding U.S. Treasuries which, if the market truly believed him, should have sent shivers down the spine of the entire world economy. Last month, responding to questions about U.S. Treasury Bills, Trump spouted these gems: "I have borrowed, knowing that you can pay back with discounts. And I have done very well... I would borrow, knowing that if the economy crashed, you could make a deal, and if the economy was good, it was good, so, therefore, you can't lose... I am the king of debt. I do love debt. I love debt. I love playing with it."
Although he later toned down his rhetoric to suggest he was talking about refinancing at lower rates, his devil-may-care attitude toward the sacrosanctity of the risk-free investment, if taken serious would have huge implications.
Imagine if U.S. Federal Reserve Chair, Janet Yellen made a comment even remotely hinting of a default on U.S. Treasuries.
The U.S. T-bill: the risk-free investment against which all other investments are measured.
Hundreds of thousands of financial calculators would burst into flames. All the small t's in the millions of financial writings all over the world would smolder into unrecognizable charcoal.
What was the actual market reaction to Trumps comments? Nil. U.S. Treasuries are still the safe-haven of governments, business and families the world over.
People are still as willing as ever to invest in them for ten years or more at a rate of return below inflation.
Still, the best answer to the question we began with is a little less exciting than all of this. The facts that fuel reality can sometimes be pretty mundane. The simple truth is that markets are probably not paying much attention yet.
Like the casual hockey fan who doesn't get interested until the Stanley Cup final, the market is waiting until things gets serious. It's all showbiz so far, and although Trump is a master of the bombastic arts, this does not yet a president make.
In the weeks and months ahead, we will have plenty of opportunity to get suggestions from the financial markets on how to digest potential outcomes.
Come late summer, watch the temperature.
All opinions and estimates contained in this report are provided in good faith but without legal responsibility. This content constitutes the writer's opinion, and is not necessarily that of RBC Dominion Securities Inc.
Mark Ryan is an advisor with RBC Wealth Management, Dominion Securities (member CIPF) and can be reached at [email protected] or 250-960-4927.
