The biggest threat to the markets isn't a Trump presidency. But if you're looking for a series of events that could usher in the end of the seven-plus-year bull market, politics is the right place to look. You just need a much broader lens. It's populist policies across the globe that could sink stocks and roil bond markets.
A stress test of investment portfolios conducted this past summer by MSCI found that European equities could lose almost a fifth of their value in the next two years if the influence of antiestablishment, populist politics continues to make gains. The situation would be barely better for investors in the United States. The same analysis found that the U.S. equity market could lose almost as much — 17.7 percent, versus 19.5 percent for European stocks. The yield on the 10-year Treasury, meanwhile, would rise by 1 percent.
The rationale is straightforward: Should populist platforms in both Europe and the United States result in reduced trade and increased government borrowing without a corresponding rise in revenue, GDP will suffer while prices will rise. Specifically, GDP growth in Europe and the United States would contract by 3 percent, and inflation could rise by 3 percent by 2018, MSCI found. "Populist policies lead to stagflation, a portmanteau of low economic growth (driven by restrictions on trade) and inflation spurred by excessive public borrowing," MSCI wrote.
"If populism prevails, the markets must prepare for a hard landing," the MSCI report concluded.
If you are looking for a precursor, consider Brexit. On Oct. 18 the U.K. reported a surprise rise in inflation, from 0.6 to 1 percent, with many economists expecting it to peak at between 3 percent and 4 percent in 2018, according to a Financial Times report. "With populist policies, it might be a real possibility of returning to inflation without a return to growth. It is a scenario hard to ignore," Remy Briand, managing director and global head of research at MSCI told CNBC.