September 27, 2016 | No Comments
NEW YORK – Wall Street rallied on Tuesday as investors appeared to cheer Hillary Clinton’s strong performance in the first presidential debate and rest a bit easier about the prospect of Donald Trump winning the White House.
U.S. stock futures rose sharply immediately following the debate, which most pundits and surveys suggested the Democratic nominee won handily. The Mexican peso soared. The currency tends to drop as Trump’s chances rise with investors betting on the GOP nominee making good on his promise of new trade tariffs. Stocks continued to climb during the day with the Dow Jones Industrial Average up over 130 points in late afternoon trading, though some of that was in response to a very strong consumer confidence number.
Market analysts say positive reaction to the debate is not because Wall Street adores Clinton or her policies on taxes and spending. Instead it’s that many do not know what to expect from a Trump presidency and fear the impact of new protectionist trade policies and possibly unpredictable foreign relations. Wall Street’s biggest fear is uncertainty.
“We’re seeing a bit of a ‘relief rally’ today. Equity markets are higher and the peso, one key anti-Trump barometer, has rebounded from its multi-year low hit yesterday,” said Jack Ablin, chief market strategist at BMO Private Bank. “Investors assumed that Trump would cement a lead from the debate, but Hillary stayed on message, Donald did not.”
Thus far in 2016, markets have not shown very strong reactions to the ebbs and flows of the campaign as many investors assumed a Clinton win. Most of Wall Street focused on the Federal Reserve over the last several weeks, wondering whether it would raise interest rates at its September meeting. But with that meeting now past, and the Fed still on hold, investors and traders are paying closer attention to the 2016 race and taking the prospect of a Trump win more seriously, greeting news of his rise in the polls with bouts of selling
“There was certainly a reaction in the futures and that was clearly related to the debate,” said Jim Paulsen of Wells Capital Management. “Traders clearly decided before the debate that a Trump win would be bad and a Clinton win would be good.”
But Paulsen cautioned not to read too much into Tuesday’s market action. “Overall there’s not much evidence of a big election impact on the markets because there has been so much else going on with global growth, earnings and the Fed.”
One area where a 2016 effect clearly shows up is in the currency markets, particularly the peso versus the U.S. dollar. The peso plunged eight percent in the three weeks leading up to Monday night’s debate as Trump rose in the polls to a virtual deadlock with Clinton. Following the debate, the peso rallied over 2 percent against the dollar, suggesting investors viewed Clinton as the winner.
Trump continued his attack on Mexico as an unfair trading partner during the debate and once again ripped the North American Free Trade Agreement as a disaster and the worst trade deal in history. “Our jobs are fleeing the country. They’re going to Mexico. They’re going to many other countries,” Trump said at the outset of the debate. “The NAFTA agreement is defective. Just because of the tax and many other reasons.” Trump also again threatened new taxes on Mexican imports, something that could lead to fewer exports from the country and thus a weaker economy and currency.
Clinton, by contrast, is viewed by many on Wall Street as generally favorable towards trade — despite her avowed skepticism about the Trans Pacific Partnership — and unlikely to unleash new protectionist policies. So when Clinton does well, markets tend to rise along with the peso.
“Most people viewed Hillary as the winner of that debate and markets clearly want Hillary to win rather than Trump, you can tell that from the way it trades,” said Steve Massocca, managing director at Wedbush Securities in San Francisco. “People are very concerned about Trump’s trade policies being bad for the economy and then there is the crazy factor. He comes across as having an irresponsible attitude at times and thin skin that would make him more reactionary than a president would ordinarily be.”
Massocca and others noted that while Wall Street does not look favorably on all of Clinton’s proposed tax increases — especially on the wealthy — she is a very well-known quantity having been in public life for decades, including as a senator from New York. She has also raised millions of dollars from Wall Street and given highly paid speeches to Goldman Sachs and other banking groups.
In addition, many big investors believe Clinton will likely be constrained by at least one side of Capitol Hill as president. That would mean more of the same kind of economic policies seen since divided government began following the 2010 midterm elections.
“Somewhere along the way everyone decided Clinton meant stability and Trump meant volatility and uncertainty,” said Paulsen. “And if it’s Clinton there won’t be all that much she can do and it will be like Obama for the last six years.”
Trump has also spooked some investors by referring to the current market as a “big, fat, ugly bubble” and suggesting it was going to burst in the near future. He has also taken the unusual step of publicly and repeatedly criticizing Federal Reserve Chair Janet Yellen, something presidential candidates and presidents generally stay away from given that the central bank is supposed to be largely insulated from the daily grind of partisan politics.
The fear is that as president, Trump could be extraordinarily involved in monetary policy, possibly damaging both the economy and financial markets.
Trump supporters argue that his presidency would actually be very good for stocks and the economy with large tax cuts for both corporations and individuals and a reduction in regulations that businesses often complain are choking off stronger growth. He’s also pledged to bring back the over $2 trillion in cash U.S. companies currently have overseas while spending hundreds of billions on infrastructure, all of which could be stimulative to the economy and good for stock prices.
Trump tried to make that case in the debate on Monday night.
“My tax cut is the biggest since Ronald Reagan,” he said. “I’m very proud of it. It will create tremendous numbers of new jobs. But regulations, you are going to regulate these businesses out of existence,” he said to Clinton. “I’m really calling for major jobs, because the wealthy are going create tremendous jobs. They’re going to expand their companies. They’re going to do a tremendous job.”