With the FTSE 100, FTSE 250 and FTSE All Share equity indices all reaching record highs, is there any evidence that UK investors are scared of the election result?
Who do you think will win the US election?
Why will he/she win?
Because there is a rising dissatisfaction with the ‘Washington elite’ and Hillary Clinton is the epitome of what is seen as the US political aristocracy. Donald Trump’s more controversial comments have upset left-wing media pundits but actually resonate with the American public. The perception is that Mr Trump isn’t scared to say what he thinks and that is viewed as a welcome change from the autocue-reading Barack Obama.
How will the US election affect UK stocks?
With a month to go until the US election, there appears to be scant evidence that UK investors are scared of the result. On 4 October, the FTSE 100, FTSE 250 and FTSE All Share equity indices simultaneously reached record highs, a feat not achieved since the peak of the dot-com bubble.
Clearly the US stock market will be the most affected by the election result. With the Dow Jones, S&P 500 and the NASDAQ all just off record highs, there doesn’t appear to be much of an election fear factor in the US either. Since the US is the world’s largest economy and the US dollar is the world’s reserve currency, it still holds true that when the US sneezes, the rest of the world catches a cold. Likewise when the US does well, the rest of the world tends to do well too.
As Donald Trump is an outsider and represents real change, this is a source of uncertainty for wealthy investors and large companies, who benefit from the status quo. Democratic presidents are generally perceived as less business-friendly, but Hillary Clinton is part of the establishment, and that poses a lot less of a threat to big business.
The uncertainty created by a Trump victory may cause stock markets to fall, but declines could be limited. At the moment the global economy is slowing, but stock markets are at record highs because of loose monetary policy. Any uncertainty would be a convenient reason for the Federal Reserve to delay hiking interest rates again. So the ‘Yellen put’ effect could mean a Trump victory is positive for the stock market.
Longer term, Mr Trump’s greatest threat to the stock market comes from his criticism of the Federal Reserve. In one interview, Mr Trump said Fed chair Janet Yellen should be “ashamed of herself” for keeping interest rates so low for so long. However, Mr Trump has personally benefited from low interest rates through his real-estate investments, so it remains to be seen whether he follows through on this criticism.
Global stock markets tend to move together so any fallout in the US, which has the biggest, most dominant stock market, will mean a similar shock to the UK. Minds only need to be cast back as far as the 2008 financial crisis to know the importance of the US economy (and on that occasion its housing market), for the rest of the world. US mortgages, including delinquent (sub-prime) mortgages were repackaged and sold to the rest of the world. When the mortgages went sour, so did the investments held by global investors. When some of these investments went south, investors got scared and sold their other investments. This is the self-perpetuating cycle that brought about the financial crisis.
An unprecedented period of low interest rates and central bank money-printing has caused some excesses, as it always has throughout history. The availability of cheap debt allows people to take bigger risks, and some of those risks won’t pay off. The excesses today can be seen in everything from student loans to antiques, from classic sports cars to financial markets. Those who can spot where the dam will break ahead of time deserve to star in the sequel to the film The Big short.
The actions taken by the next US president will play a big role in what happens to all the excesses that have been built into asset prices. Stock market crashes are inevitable, but how deep and damaging they are could well be shaped by whether it is a Trump or Clinton presidency.
As an example, former president Bill Clinton repealed the Glass-Steagall Act, which prohibited commercial banks from engaging in the investment business. He also signed off on the Commodity Futures Modernization Act of 2000, which made sure over-the-counter derivatives were not regulated. Both of these meant huge risks were taken in financial markets and culminated in the 2008 financial crisis.
So while Mr Trump is considered the risky alternative of the two candidates for the US economy, if her husband’s record is anything to go by, Hillary Clinton is as dangerous as it gets.
It’s not the exclusive domain of Democratic presidents to cause risks to the US and global economy. Republican president George W Bush massively expanded the US Department of Housing and Urban Development by requiring that Fannie Mai and Freddie Mac, the nation’s two largest housing finance companies, buy $2.4 trillion in mortgages from low income families. While the aim of providing housing to low income families is laudable, it eventually led to the infamous NINJA (No Income, No Job or Assets) mortgages loans. It was the high rate of default on these loans which collapsed the mortgage-backed security market and brought down Lehman Brothers.
What politicians say they will do before elections and what they actually do are quite different, so forecasting growth on proposed tax, spending and immigration policies for example is next to impossible. This is not all the fault of the politician. There is a political machinery in Washington (like Westminster) that is difficult, if not impossible for one man or woman to change. Still, like big companies, the culture of a government comes from the top.
In summary, the next US president will still be the ‘leader of the free world’ and will have a large bearing on the future of the US economy, and thus the global and UK economy. In stock market terms the economy is playing second fiddle to central banks, so it will be the response of the Federal Reserve, and to a lesser degree the Bank of England, to the election that ultimately decides the direction of the Dow Jones, and by that virtue the FTSE 100.
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