Why the Markets Are Tuning out Trump and Clinton

10.13.2016 - Ronald J. Sanchez

With two presidential debates behind us, the markets appear, by and large, to be taking campaign rhetoric and mudslinging all in stride.

While there has been no shortage of headline-grabbing policy proposals, very few seem to have elicited a broad-based response from financial markets. This calmness is in stark contrast to a campaign that has been characterized by deep political divisiveness.

We see three possible reasons the markets have tuned out the noise:

1. The markets have already priced in the likelihood of a Clinton victory.

Rightly or wrongly, voters assume that a Clinton victory probably means "business as usual" for some time. In many respects, Hillary Clinton is perceived as the candidate of the status quo, similar to an incumbent, more likely to continue along the path of her predecessor than to shake things up in Washington. In contrast, Donald Trump is viewed as the standard-bearer for sweeping change, galvanizing his supporters with a populist message that is highly critical of government regulation and US trade agreements.

2. Legislative paralysis decreases the likelihood of any sweeping change.

Although the media has focused on the most sensational aspects of this presidential campaign, the fact remains that our three-branch system of government limits the president's power. What a presidential candidate promises on the campaign trail and what he or she can actually implement in the Oval Office are two very different things. Broadly speaking, the president is able to affect trade and regulation through the use of executive orders and the bully pulpit that comes with being president. But for undertakings such as infrastructure spending or tax reform there are 100 senators and 435 representatives who decide what does or does not become law.

3. The Brexit vote may have taught investors something about over-reacting.

While the Brexit decision caught investors by surprise, triggering a global equity market selloff, those losses quickly reversed. Investors realized the full implications of the Brexit vote were unclear and changes would not happen immediately. A similar scenario could play out if election results catch financial markets by surprise.

Potential Market-Movers

A Trump victory would likely be most disruptive, as markets scramble to figure out just how radically his policies might reshape American businesses and foreign trade. A Clinton victory could also spark volatility if the balance of power in Congress tips in favor of Democrats, which would presumably make the path to implementation of the mandates she has endorsed on the campaign trail less difficult.

With all of that said, history shows that market volatility may pick up regardless of the outcome on November 8th. We have seen that the performance of the S&P 500 Index tends to be range-bound before most presidential elections, but usually moves more significantly in one direction or another after the results are in. One possibility for this is that investors find it easier to position for the upcoming legislative agenda once the political landscape has been solidified.

Kyle Hutchinson, a member of Fiduciary Trust's Asset Allocation Group, contributed to this report.

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