What Happens to the Markets if Donald Trump Wins?

No one's priced in a Trump win: Investor

Assume, for a moment, that Donald J. Trump wins the presidency.

Some readers of this column will shudder at the thought and might even stop reading now. Others in the business world will beam, like Peter Thiel, the Silicon Valley entrepreneur.

But what exactly happens the day after? To markets? To the economy?

The conventional wisdom is that, right off the bat, the stock market would fall precipitously. Simon Johnson, the Massachusetts Institute of Technology economist, posited that Mr. Trump's presidency would "likely cause the stock market to crash and plunge the world into recession." He predicted that Mr. Trump's "anti-trade policies would cause a sharp slowdown, much like the British are experiencing" after their vote to exit the European Union.

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In explaining his prediction, Professor Johnson wrote that Europe's economy is so fragile that "Trump's trade-led recession would tip Europe back into full-blown recession, which would likely precipitate a serious banking crisis." After that, he continued: "If this risk were not contained — and the probability of a European banking debacle is already disconcertingly high — there would be a further negative spiral. Either way, the effects on emerging markets and all lower-income countries would be dramatic."

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Professor Johnson's view may be a bit hyperbolic, but to one degree or another, his pessimism is shared by many economists across Wall Street, from Citigroup to Goldman Sachs. Each cites a different set of reasons the markets will fall if Mr. Trump wins.

But is the conventional wisdom right?

Naturally enough, investors and analysts hate uncertainty. Hillary Clinton largely represents the status quo. Mr. Trump is more like Forrest Gump's "box of chocolates," as Peter Boockvar, chief market analyst at The Lindsey Group, an economic advisory firm in Washington, put it. "You never know what you're going to get."

In all likelihood, a Trump victory would lead to a swift, knee-jerk sell-off. Many investors will choose to sell stocks and ask questions later.

But in the days and weeks after a Trump victory, among investors who cull their portfolios carefully, the decision about buying and selling will be company by company, industry by industry, currency by currency and so forth.

In truth, it's impossible to predict how the markets would settle into a Trump presidency, despite the speculation on all sides. In all likelihood, it will take time for investors to truly make sense and "math out" how his policies would affect the economy. Yes, the Mexican peso would most likely fall on fears of a trade fight — Goldman Sachs says it could fall by as much as 25 percent — and shares of some insurance companies could tumble on the uncertainty of what would happen if Obamacare were repealed.

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But oil companies and other sectors of the traditional energy industry would be likely to rally given Mr. Trump's plan to repeal regulations. (Renewable energy companies would fall.) Health care and biotechnology stocks, which have been driven down over concerns that Mrs. Clinton will seek greater regulation and possibly even price controls, might also pop.

If Mr. Trump wins, two companies that seem poised for an immediate pummeling are AT&T and Time Warner, given how much Candidate Trump has objected to their recently announced merger plan. AT&T, by the way, also happens to have a huge business in Mexico.

The biggest test for the stock markets might be pegged to the future leadership of the Federal Reserve. "There is much more uncertainty regarding who Trump might nominate, though he has made it clear he would not renominate Chair Yellen," Goldman Sachs wrote in a note to clients. "His criticisms of Fed policy are somewhat ambiguous; he has suggested rates have been left too low for too long, but also warns of negative consequences of rate hikes. We would expect that financial markets would view a Trump victory as having slightly hawkish implications, since it would make a change in what many view as a dovish-leaning Fed leadership much more likely."

A handful of economists have suggested that despite all of the promises made by the candidates, the outcome of the election might not actually decide what direction the markets will take.

"Putting aside their personalities and policy proposals, it will likely not matter who the next president is when it comes to where markets go," Mr. Boockvar wrote in a note to clients. "As we are in the second-longest bull market of all time, and as we approach the eighth year of this economic expansion," he wrote, "odds are high that whoever the next president is, they will preside over a recession, a bear market and rising debts and deficits."

That might be too bearish of a view, but given that we've had a financial crisis of some sort about every eight years or so for the last several decades, it is hard to believe that we will go through the next four years without a hiccup. If merger activity is a gauge of the market's cycle, the recent spate of deals suggests we're closer to the ninth inning than the first.

Lawrence G. McDonald of ACG Analytics, who has commented on the potential benefits of a Trump presidency, said, "Trump will create a colossal panic, but the relief rally will be outstanding."

Mr. McDonald, who publishes a newsletter on global political risk called the Bear Traps Report, said he believed that "Trump's bark found in his anti-globalization position in reality will be a lot worse than its bite in terms of actual implementation."

While Mrs. Clinton is clearly the favorite choice of Fortune 500 chief executives and investors, Wall Street, perhaps surprisingly, is less enthusiastic about the idea of a Clinton presidency combined with potential Democratic majorities in the House and the Senate. "The S.&P. 500 has tended to react poorly to increases in the implied probability of a Democratic sweep, after removing the estimated effects of changes in growth, inflation and policy expectations," Goldman Sachs wrote. "The upshot is that the equity market appears to favor Clinton to Trump, but also seems to prefer divided government over single-party control."

One thing is certain, though: While Mr. Trump's business brand may have cooled during the contentious campaign, surely under a President Trump, lobbyists and other favor-curriers would be lining up for tee times at The Mar-A-Lago Club in Palm Beach, Fla., and inauguration week reservations at the newly opened Trump International Hotel in Washington. Some behavior is not hard to predict.