The financial markets have been reluctant to face the implications of a possible Trump victory in the US presidential election due to be held on 8 November.  Perhaps to many market participants Mr Trump’s statements thus far in the election campaign have seemed so extreme and impractical as to render him unelectable.  It may be, though, they have not realised how the world is changing, not necessarily in ways favourable to investors.  The very features that, in their view, count against Mr Trump could yet increase his chances of winning.  Often in the past, US elections have appeared to present electors with little genuine choice.  On broad policy issues, the differences between the candidates have been minor; the matter has been settled on the basis of personalities and ‘spin’.  Personality is playing a major part in the current campaign but, if their stated positions are any guide, there are also significant differences between Mr Trump and Ms Clinton in several policy areas.  The markets should be more sensitive than they have been to the ebb and flow of US public opinion ahead of polling-day.

Mr Trump’s poll rating suffered a setback in the wake of the Democratic Convention, possibly reflecting his ill-judged comments regarding the family of a dead Muslim US soldier.  In the first week of August, nationwide opinion polls showed Ms Clinton, on average, about six percentage points ahead of Mr Trump.  Since then, Trump support has strengthened to such an extent that polls reflecting opinion in the week to 12 September show the candidates more or less tied.  What is not clear is the extent to which these polls may be biased.  Possibly, in view of the controversial nature of Mr Trump’s stated positions, some voters are reluctant to indicate their preference for him.  If so, a tied position in the polls may be consistent with a lead for Mr Trump in actual voting intentions.  The widely-monitored two-way nationwide polls could, moreover, give a misleading impression of the real state of the race to the White House for two further reasons. First, there are not just two but four candidates with significant support among voters.  Secondly, the presidential election will not be decided by the popular vote across the USA but will be won by the candidate who gains the majority of delegates in the Electoral College.  In the 2000 election, Mr Gore won a majority of the popular vote, by 48.4% to 47.9%, yet failed to win the Presidency against Mr Bush’s wafer-thin 271-266 Electoral College majority.

Besides Ms Clinton and Mr Trump, Ms Stein and Mr Johnson are also gaining significant support among US voters.  Ms Stein is running under a Green banner.  She is regularly garnering support of around 3% in the polls. These are probably voters who would usually regard themselves as Democrats and might otherwise have been expected to support the Democratic candidate. This effect is likely to be balanced, or even outweighed, by the impact on the polls of Mr Johnson, the Libertarian candidate. He is likely, if anything, to be drawing away support from that faction among the Republicans who have previously looked to Mr Ron Paul for inspiration.  However, if there had been no Libertarian standard-bearer and there had been a conventional Republican candidate, these voters might have abstained.  Their defection from the Republicans may, therefore, be less serious than it might seem at first glance.  Nevertheless, those opinion polls that allow choice between four candidates have shown Ms Clinton ahead of Mr Trump by about 3%. That suggests the Donald is more dependent on ‘shy’ Trump supporters than he might regard as comfortable.

The full implications of the polls only emerge, however, when the results are examined on a disaggregated basis.  This is because the Electoral College is constituted, state by state.  Electors in the College are apportioned in line with the number of members of Congress to which a state is entitled.  Each state has two Senators and a number of Representatives in proportion to its population.   In all, there are 100 senators and 435 representatives.  Together with three additional electors from the District of Columbia, this makes a total of 538 electors in the College.  Most states choose electors on a ‘winner-takes-all’ rule, the exceptions being Maine and Nebraska, where each congressional district chooses one elector by popular vote.  Since these exceptional states have only nine Electoral College votes between them, this wrinkle is unlikely to affect the outcome. The standard method of judging how well a candidate is doing is to compare his/her opinion poll rating with how well his/her predecessor as party standard-bearer performed in the previous election.  This approach shows Mr Trump doing less well than Mr Romney in those states that Mr Romney won in 2012.  However, he appears to be doing better than Mr Romney in those states that Mr Obama won four years ago.  This is not so surprising since Mr Trump is hardly a typical Republican; he will be less appealing than Mr Romney to middle-of-the-road Republican voters but perhaps more acceptable to working-class voters who have previously voted Democrat.  In many states, there will probably be a strong majority either for Ms Clinton or for Mr Trump. As things were standing a week ago, Ms Clinton appeared to be heading for an Electoral College majority of about seventy in those states that, in 2012, recorded a strong preference for either Mr Romney or Mr Obama.  But that still leaves up to 250 Electoral College seats up for grabs in the
‘swing’ states, the states where the popular vote usually determines the outcome of the election.  If Mr Trump were to win a large enough majority in these states, he could still emerge as overall victor.

The most important of the ‘swing’ states are Texas, with 38 electors in the college, Florida (29), Pennsylvania (20) and Ohio (18).   In the 2012 election, Texas was won by Mr Romney but the other three major ‘swing’ states went to Mr Obama.  The latest state-wide sounding of opinion in Texas, with polling between 7 and 10 September, showed Mr Trump a solid six points in the lead in a four-way race.  Most recent polls suggest that in Florida there was not much between the two major candidates a week ago. Meanwhile, Ohio, like much of the mid-West, has been swinging sharply
towards Mr Trump, whereas Ms Clinton last week had a solid five percentage point lead in Pennsylvania.  If Mr Trump were to win Florida and hold Texas and Ohio, it seems, he might be close to reaching an overall majority in the Electoral College.

Opinion polls have yet to be published reflecting voter preferences following the dramatic manifestation of Ms Clinton’s health problems.  There has been a poll showing only 45% of US voters accept the Clinton team’s explanation of her collapse.  Pneumonia is a condition, not a specific disease; we should not be too hasty in rejecting any particular set of symptoms as a sign of the condition.  The fact that so many US voters are ready to do so underlines the weak credibility of the Clinton campaign.  A candidate for whom credibility was a less serious issue might not be having so much trouble staying ahead of Mr Trump.  That said, representatives of the status quo and of received opinion are having trouble winning elections the world over.  There is a popular reaction against experts, be they scientists, economists or political fixers.  This is hardly surprising, given the pass to which the world has been brought under the dominion of these ‘experts’. Dangerously for political stability, the ‘experts’ are seen to have found means of insulating the elite from the costs of the world economy’s disappointing performance while shifting those costs on to the mass of voters.  That never looked like an approach that would succeed for long.  The novel techniques of ‘spin’ were effective in diverting voters’ attention for a while, but the wise words of Abraham Lincoln on the subject of fooling the people pointed to the eventual failure of this strategy.  It should be noted that Lincoln did not say how the people would react when they realised they had been fooled.  There should have been no assumption that their response would be constructive.  Hence, ‘expert’ doubts on the wisdom or practicality of Mr Trump’s proposals are beside the point when judging how US voters are likely to behave on 8 November.

In seeking to draw out the implications for financial markets of a Trump Presidency, the problem is there have been few indications regarding the views of those who might be his principal advisers or, indeed, whether he would be much inclined to take advice.  For the Republican Party hierarchy, the objection to Mr Trump as presidential candidate has been that he is not conservative enough.  He has, for example, proposed introducing paid maternity leave, financed by government, for those women whose employers do not offer it.  His views have evolved even during the short span of the presidential campaign, however, and could yet evolve further.  His card of proposed measures is very full and, in places, self-contradictory.

The markets’ immediate concerns are likely to relate to Mr Trump’s views on economic policy.  He has spoken in favour of giving Congress responsibility for auditing the Fed’s decisions and has indicated he might be inclined to change personnel on the Federal Reserve Board.  That might not be so easily accomplished in the event.  He also favours restoring the USA to the gold standard, while admitting that would be difficult to do.  None of this may amount to much in practical terms. Fiscal policy is a different matter.  The Republican candidate is very keen on both stepping up infrastructure spending and cutting tax rates.  As advocates of expansive fiscal policy are wont to do, he assumes that the economic growth these steps could generate would boost tax revenues and help limit any increase in the federal budget deficit.  The non-partisan Committee for a Responsible Federal Budget (CRFB), by contrast, has estimated the Trump plans would see federal debt rising to 127% of GDP by 2026 from 74% last year.  It is no longer clear whether Mr Trump would repeal Dodd-Frank, as he once indicated he would. But he has left no doubt that, in trade policy, he opposes the Trans-Pacific Partnership (TPP), and would even wish to renegotiate NAFTA.  The US trading relation with China would be his chief target for action; he has spoken in tough terms of waging a trade war.

Ms Clinton’s fiscal proposals include more infrastructure spending and a boost to federal spending on health and education, offset by increased taxes on high-earners.  She would create some tax credits for families while closing loopholes in the corporate tax code.  An important plank in her policy is a proposal to provide student debt relief by allowing those with existing debt to refinance at the much lower rates currently charged on new loans, with the federal government picking up the tab for the difference. The CRFB has estimated that the net effect of her proposals would be to raise the federal budget deficit to 87% of GDP by 2026.  Ms Clinton, despite her much-criticised links with Wall Street, says she would like to strengthen financial regulation, going beyond the provisions of Dodd-Frank. On international trade, she is opposing the TPP (but Mr Obama threatened to renegotiate NAFTA in his 2008 campaign!).  Overall, her economic policy proposals appear much less radical than those of Mr Trump.

A Trump election victory might be expected to increase yet further the mood of uncertainty overhanging financial markets.  Not least, investors might perceive the risks stemming from US foreign policy as more serious than they had previously discounted.  In such circumstances, it would not be surprising if funds sought safety.  Paradoxically, that might result in US repatriation of assets, a flow that would tend to boost the US dollar relative to other major currencies.  That might at least relieve pressure on the Bank of Japan and the ECB, as they try to engineer higher domestic inflation rates and rescue their own credibility.  Electoral success for the seemingly radical Mr Trump may turn out, at least in the short run, to be a stabilising influence.

Stephen Lewis

Stephen Lewis is a highly respected and experienced economist and is currently employed as the Chief Economist at ADM Investor Services International. He also serves as Treasurer of the Forum for European Philosophy and was five years ago elected to the Royal Institute of Philosophy.