The US Presidential election - Key lessons for investors and forecasters

The surprise election of Mr Donald Trump as 45th President of the United States – by a convincing majority in the electoral college – raises four questions that forecasters and investors need to confront.

  1. Why did Mr Trump win?
  2. What inferences – if any – can investors make about a global anti-establishment movement?
  3. Following on from the surprise Brexit decision, why did the polls fail to predict Mr Trump’s victory.
  4. Going forward, what does a Trump presidency look like for risk assets?

Why did Mr Trump win?

The consensus appears to have focussed on income disparities and growing disillusionment in the community around globalisation.  The fact that Mr Trump was able to break the Democratic ‘fire wall’ of the rust belt states – Michigan, Pennsylvania, Wisconsin, Ohio – lends support to the view that the President elect was able to mobilise disaffected and marginalised working class males who had either lost their jobs in manufacturing or who harboured aspirations of a return to the once dominant manufacturing base in those states.  Moreover, Mr Trump was able to mobilise and tap into a growing anxiety and frustration among the working and middle classes who have borne the brunt of growing income inequality, which has increased to a level not seen since the early part of the 20th century.

Mr Trump represents the ultimate anti-establishment figure with striking similarities to Mr Silvio Berlusconi, the former Prime Minister of Italy.  Voters in other countries – including Thailand – have also previously elected anti-establishment figures that have had successful business careers.  Of course, an anti-establishment movement is unlikely to gain traction without a sense of economic stagnation, low income growth and anxieties around job security for those who are employed.

Nonetheless, the current President’s ratings are at their highest level in over six years.  If a sense of economic stagnation by the forgotten working classes had underpinned Mr Trump’s election, then surely Mr Obama’s approval ratings would have been plumbing new lows rather than lifting to close to historical highs.  Nor would US voters have voted for a Republican controlled Congress.

In terms of the arithmetic of the outcome, it appears that Ms Clinton will win the popular vote by up to 1.5 percentage points but lose the electoral college vote.  For whatever reason, she was not able to mobilise enough supporters in the key swing states.  As the President elect, Mr Trump could well have the lowest popular vote since Mr Bill Clinton in 1992.

What inferences – if any – can investors make about a global anti-establishment movement?

Mr Trump was able to tap into the mood for change and backlash against the establishment not just because of his status as a political novice.  Importantly, he projected an image of a person who was able and willing to speak his mind, and be a straight talker rather than resort to political speak.  It is reasonable to think that his messages and communications were not hostage to spin doctors or focus groups.  Of course, going down this path gains traction only if the message resonate with voters.

The anti-establishment movement was evident in Australia’s federal election in July, where One Nation gained a number of Senate seats and where micro parties more generally won a bigger slice of the Senate and House of Representatives.  The Brexit vote also arguably reflects growing anti-establishment sentiment.

Against this backdrop, investors should be looking ahead to elections in 2017 in Germany, France and the Netherlands, and the prospect of a resurgence of fringe parties (both on the left and right).  If the backlash against establishment politics and political correctness represents a global phenomenon, investors will need to confront the prospect of renewed political instability not just in the United States.

Following on from the surprise Brexit decision, why did the polls fail to predict Mr Trump’s victory?

According to political forecaster, Mr Nate Silver (founder of 358.com), the polls – on average - were assigning a probability of a Trump victory at less than 30% immediately before election day.  The predictions of most polls was incorrect for three reasons according to Mr Silver.  The final result was well within the margin of error.  Polls are far from perfect, particularly if Trump supporters (like Brexit supporters) were reluctant to reveal their preferences to pollsters.  Second, the unusually high number of undecided voters contributed to greater uncertainty surrounding the outcome.  Third, the main cohorts of Clinton supporters – college educated whites and Hispanics – were not concentrated in swing states.

Going forward, what does a Trump presidency look like for risk assets?

This represents the key question for investors and market watchers.  At one stage as the day unfolded, futures markets pointed to a 750 drop in the Dow Jones.  At the time of writing (2200 AEST), this has been pared back to a 350 point drop or around 2%.  The conciliatory nature of Mr Trump’s acceptance speech might have allayed some investors’ concerns.  In fact, some might have been encouraged by his focus on infrastructure spending to kick-start growth, as well as a conciliatory tone to leaders of other countries and no mention of any dividing walls (for now anyway).

Those tempted to draw parallels between the outcome of this election and the risk on trade soon after the Brexit decision should tread cautiously.  The Bank of England calmed market jitters immediately following Brexit and announced that it would stand ready to inject liquidity into the financial system if necessary.  The path forward for the Federal Reserve is a difficult one.  During the election campaign, Mr Trump openly politicised the independence of the central bank by criticising Ms Janet Yellen’s policy of maintaining low interest rates.  In the event that Mr Trump continues to not respect the independence of the Federal Reserve, I believe that Ms Yellen’s position is untenable.  Political instability around the central bank is not conducive to risk assets outperforming.  Nor is the prospect – cited above – of the spread of anti-establishment fringe parties in key elections in Europe next year.  With the S&P500 earnings yield currently at 6%, its lowest level in over a decade, there isn’t much margin for error for risk assets.