The 2016 Presidential Elections and Financial Markets
Of all the many things that will define 2016 and possibly years to come, one of the most staggering is the volatility in the markets that have met elections this year. The two most high profile: Brexit and the US election saw markets fall and rebound reacting to polls, results and the speeches of officials. In both cases, investors reacted to the surprise in election outcomes which are defying previously long-held interpretations of things like poll data as well as connections between politicians and voters. Typical understandings of left and right wing politics are being replaced by attitudes relating to openness in society and the economy.
Typically, the markets have responded by interpreting. Following the U.S. election, markets responded to messages from President-elect Mr. Trump and have been closely following Trump’s cabinet selections. Similarly, in Britain markets are contemplating the possibility of a ‘soft’ or a ‘hard’ Brexit, attentively listening to government ministers. With a succession of elections in Europe next year in France, Germany and the Netherlands which could have serious implications for the European Union and the Eurozone, markets will almost certainly be volatile as investors balance the possibilities of the election outcome.
On the whole, the markets respond positively to more conventional policies. For example, most investors have been reassured by a moderation in the tone of President-elect Trump as well as the belief that his own party will restrain some of his more extreme policies relating to issues such as immigration and trade. This is similar to what is happening with Brexit. The markets have reacted with volatility to suggestions that Britain may abandon the Single Market altogether and subsequently reassured by suggestions to the contrary.
This, however, reflects short-termism. Just as the thought of Trump’s policies being moderated, a lighter form of Brexit taken and the possible re-election of Angela Merkel in Germany has calmed the markets; it ignores the underlying sentiment that is driving these election outcomes. When US voters realize that Trump is unlikely to reopen hundreds of coal mines and that cheaper Chinese products will continue to flood the U.S. market, the reaction could be an even starker rejection of the status quo. If Britain chooses economic security over stopping free movement, how will those voters who voted against immigration react?
It is reasonable for investors to take stock after a surprising election result and to see the positives and negatives based on interpretations of the actions of politicians. However, it is also important not to ignore the shift in political sentiment which may decide elections in the near future.