The financial world is betting on one election outcome. What if it’s wrong?
Public opinion polls and political pundits suggest a tightening race between Hillary Clinton and Donald Trump, but the way the business community is acting, the election is over.
And Hillary Clinton has won.
Notwithstanding recent Wall Street jitters, most business and financial indicators are betting on a continuation of the current path, with a President Clinton extending Obama administration policies, kept in check by a GOP-controlled House.
The stock market, for example, has been unusually calm for months, especially in light of the ugly campaign and often unpredictable comments and behavior of Trump, who has at various times attacked Federal Reserve Chair Janet L. Yellen, vowed to renegotiate long-standing trade deals and warned of an impending stock market collapse.
In the final days of the campaign, investors may have started to take notice. Despite a healthy jobs report Friday, stocks ended modestly lower, with the broad S&P 500 index extending its losing streak to nine sessions, the longest since 1980.
Even so, both the S&P and the Dow Jones industrial average remain above levels from the start of the year and are down 5% and 4.2%, respectively, from record highs in mid-August.
Moreover, an absence of significant financial hedging and stability in other indicators measuring risk and uncertainty suggest that most business leaders and investors are expecting a Clinton victory Tuesday.
“What you see almost uniformly is this belief in the continuation of the status quo,” said Andrew Lowenthal, a principal at Monument Policy, a government relations and public affairs firm in Washington.
Given the wild-card nature of Trump’s candidacy, Lowenthal said, one would think company executives might be planning for contingencies and giving shareholders some guidance about the future. “But there’s no discussion, not even lip service to it,” he said.
You can’t jump on the [Trump bandwagon], because you’re going to lose in the court of public opinion.
— Anthony Scaramucci, a member of Trump’s economic policy council
A few companies, such as Dunkin’ Donuts, have blamed uncertainty over the election for weakness in sales. And some investors overseas appear to be getting nervous about the closeness of the race in the U.S.
But Nicholas Bloom, a Stanford University professor, said that judging by the political uncertainty index that he and fellow economists constructed, “no one is putting much weight in his [Trump’s] winning.”
The index — based largely on newspaper articles related to the economy and government policy — had been averaging about 75 in recent days, compared with the long-term average of around 100. On Friday, it jumped to 167, a reflection the tightening polls since the FBI made its surprise announcement last week that it would look at newly-discovered emails possibly related to Hillary Clinton.
But that’s still far below its level after the surprising British vote in June to leave the European Union, when the index hit 500.
“If Trump were likely to win, there’d be a massive amount of uncertainty” reflected in the index, Bloom said.
Markets also point to a Clinton White House. Clinton, for example, has railed against high drug prices and could take a tougher hand with big pharmaceutical firms – and analysts say that’s reflected in the industry’s nearly 10% stock slide in the last year, according to an index by Dow Jones.
Meanwhile, there’s been a jump in sales recently at gun maker Smith & Wesson, a sign that people expect Clinton will push through tougher rules on gun ownership, said Lowenthal of Monument Policy.
“These are the 2nd Amendment defenders who are the bedrock of Trump’s support,” Lowenthal said. “You don’t do that if you think Trump is going to be president and make it easier to buy a gun.”
What if things don’t turn out the way business leaders expect? Given the lack of stock put in a Trump victory, there’s little doubt that such an outcome would trigger an initial shock to financial markets, just as the so-called Brexit vote did.
Longer term, the surprise over a Trump victory and uncertainty over what it would mean could translate into less investment and innovation in the economy – with negative effects on new jobs and income growth, experts predict.
“It’d be like a successful coup or revolution,” Bloom said. “When a new guy storms into the palace, for months nobody knows what’s going on.”
At the same time, a narrow Clinton win that is contested as illegitimate by Trump could inject a potentially dangerous amount of uncertainty that could roil markets and keep businesses from investing and hiring.
Or conversely, a huge victory by Clinton, including a Democratic takeover of Congress, might worry businesses and investors as that would remove the check provided by Republicans to block more progressive policies.
Bloom estimates that high levels of uncertainty during the Great Recession had such a chilling effect on businesses that it knocked 2 percentage points from economic growth.
The uncertainty factor in a Trump win, he predicted, might reduce growth by 1%, or roughly $190 billion.
“In general, businesses like a more certain economic and political environment, stability so that they can plan,” said Joshua Feinman, chief economist and managing director at Deutsche Asset Management in New York.
“A Clinton win that is accepted and accompanied by the Republicans retaining at least the House would be viewed as an uncertainty-reducing event and one that takes volatility off the table and that keeps us pretty much close to status quo,” Feinman said.
Feinman did notice investors and markets reacting on Friday when the FBI said it would look at newly discovered emails that might be relevant to the probe into her emails. That news briefly sent the S&P down nearly 1% before it recovered slightly.
PredictWise, which generates odds from market-based trades, has Clinton’s chances of winning at 86%, down from a high of 91% last month.
“It gives me a little eerie sense -- the markets were very calm, very sanguine going into Brexit. And then it was like, ‘Uh, oh,’” Feinman recalled of the turmoil in stock and currency markets around the world following the Brexit vote. “So maybe that should give us pause.”
Anthony Scaramucci, a member of Trump’s economic policy council, thinks that the polls have it wrong, just as they did with Brexit.
Top corporate executives and others, he said, are reluctant to voice support for Trump, even if they secretly want him to win because they like his tax breaks and other pro-business policies.
“You can’t jump on the [Trump bandwagon], because you’re going to lose in the court of public opinion,” said Scaramucci, founder of the investment firm SkyBridge Capital and author of the book “Hopping over the Rabbit Hole.”
No doubt many business leaders support Trump’s plan to more than halve the corporate tax rate to 15%, as well as his pledge to reduce government regulations. At the same time, his views on slowing immigration and scaling back trade worry many businesses, though few are confident that Trump, as president, would be able to easily enact his policies given the partisan rancor that has characterized the last few years in Washington.
“Either way, with Clinton or Trump, legislative policymaking is still going to be very difficult,” said Eric Cantor, the former top Republican and House majority leader. Now with the investment banking firm Moelis & Co., Cantor acknowledged that polls point to a Clinton win, but he added, “It’s not a done deal yet.”
For R. Vernon Mangels, chief executive of Anaheim RV Park near Disneyland, the political and economic uncertainty already has cast a huge cloud over his 60-year-old family-owned business.
Mangels wants to buy a parcel of land nearby to expand. He has repairs and upgrades to make on sewer pipes, electric and other utilities at his six-acre park. But he’s put all that on hold, and is waiting for greater clarity in the economic and political picture.
The 55-year-old isn’t optimistic. “The polls indicate she’s got it,” he said of Clinton, who Mangels thinks will take a harder line on regulations and and hurt the economy by boosting federal spending.
Mangels likes Trump better, but sees huge challenges and uncertainties under him as well.
“He’s not a politician. I don’t think he knows at all how he’s going to bring together a divided group of folks to go in one way. He’s either going to have to water down everything he’s said or he’s going to create impasse.”
Follow me at @dleelatimes
2:10 p.m., Nov. 4: This article was updated with Friday’s market closing data.
This article was originally published Nov. 3 at 3 a.m.
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