The election of Donald Trump as the next president of the United States has come as a shock to financial markets, as polls had been predicting a narrow victory for Hillary Clinton. Initial reactions have been negative for risk assets, for a number of reasons. First, Trump’s professed policy priorities suggest a radical break from the establishment consensus. In addition, many of the initiatives president-elect Trump proposed during the campaign — such as trade restrictions and deportation of illegal immigrants — are clearly negative for US economic growth. Third, representing a break from the establishment, his policies carry a higher risk of unforeseen consequences, including reactions of foreign countries to trade, immigration and foreign policy shifts. Finally, many of Trump’s policy pronouncements have been vague or fluid, and have engendered uncertainty among investors and with much of the public. Indeed, uncertainty may remain elevated for quite some time, not just until Trump’s policy priorities become clear, but as the public attempts to understand the impact of policies that could differ meaningfully from prior Democratic and Republican administrations. As such, we anticipate a higher political risk premium to be discounted in asset prices for the foreseeable future.
Trade and immigration policy constitute significant areas of concern as we contemplate a Trump presidency. This is because a US president has considerable latitude in both these areas. And we are hesitant to dismiss Trump’s pronouncements on trade and immigration as mere campaign posturing. At some point, one has to accept the words of a candidate for higher office as an expression of policy intent. Still, we acknowledge our own uncertainty over which Trump will govern. Will it be the populist candidate elected on promises to bring jobs back home even if it means a trade war, and to deport over ten million people, many of whom are critical members of the labor force? Or the pragmatist who stakes out tough positions as a negotiating tool and would ultimately not pursue policies that would clearly have a negative impact on growth. In reality, we are likely to see both sides of Trump in the coming years. But this continuing dichotomy will itself engender uncertainty, and does not increase our confidence in the economic outlook.
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