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How will the US election affect the markets?

Explore the impact the winning candidate and their policies could have on the markets.

All trading involves risk. Losses can exceed deposits.

How could the overall outcome affect the markets?

As tough a battleground as US politics can be, the eventual result might have relatively less of a market impact than, say, a UK election would. 

There are several reasons for this. One is that the differences between the two major parties, for all the harsh words on the campaign trail, are ones of degree. Another is that the checks and balances built into the US system make radical change unlikely, no matter who wins. 

Even so, this has been a presidential race unlike any other, and the high-profile rhetoric we’ve seen has raised the stakes in a way few would have anticipated a year ago. 


Trump’s approval numbers may have diminished, but he has managed to subvert expectations every step of the way – and it would be a mistake to write him off now. This means there’s bound to be some added market trepidation in the run-up to election day. Keep an eye on the dollar, in particular currency pairs like GBP/USD, USD/JPY and EUR/USD


The real impact of a Clinton or Trump presidency will take years to assess, but there are historical precedents we can use as indicators. Studies have shown that, between 1929 and 2011, the US stock market gained more under Democratic than Republican presidents, which could mean that a Hillary win would be good news for the Dow and S&P 500. Small caps also tend to do better under Democratic presidents, so the Russell 2000 index (which tracks this section of the US equity market) may be worth a watch.


On the other hand, fiscal conservatism – the kind now being touted by Trump – has always played better with bond markets. A Republican victory might therefore see an increased interest in buying US Treasuries. Whether this will be the case on this occasion, however, remains to be seen.

What could each of the candidate's policies mean for markets?

Donald Trump

Look up Trump’s fiscal plan online and you’re bound to see one number crop up time and time again: $5.3 trillion. 

That’s the debt Trump is projected to add to the US government’s current $19 trillion in the next ten years. Take this figure with a pinch of salt (as we’ve noted, many of his policies are unlikely to come to fruition), but it nonetheless indicates why his policies are likely to get more of a response from the markets.

So what might his policies mean for the financial markets?

Tax reform

Generosity may not be an attribute frequently attributed to Trump, but – at least from a tax perspective – it is a key part of his strategy. 

Income tax rates in the US are currently split into seven brackets, ranging from 10% to 39.6%. Trump’s plan would change this to three, in turn eliminating 75 million households from paying anything at all, and demanding a maximum of 25% from the highest earners. By creating a more generous system, he claims, domestic investment will increase and tax avoidance will fall – which could see an indirect boost to both the dollar and major indices. 

By halving corporation taxes, he is making a distinct effort to encourage American companies, who are withholding an estimated $2 trillion in profits overseas, to keep their operations at home. Reducing their taxes could give certain corporations’ values a shot in the arm, and in turn lead to higher stock prices – particularly for those companies not currently favoured under current tax laws.

Higher spending

By cutting taxes so dramatically, Trump is opening up a gaping tax hole in the short term, which significant cuts in the budget would be required to fill. But even his proposals to scale back federal programmes, sell off government assets and cut out ‘waste, fraud and abuse’ are at best a fractional measure – if he can implement them. 

Meanwhile, he has so far been unwilling to revisit entitlement costs such as social security and Medicare, by far and away the biggest drains on the budget. As such, his current fiscal policies would send the national debt spiralling out of control. In the run-up to election day – and beyond, if he gets into office – this could make for an apprehensive dollar.

High trade tariffs

Markets may have cause for concern elsewhere, too. Trump’s threats of stringent trade tariffs on Mexico and China (35% and 45% respectively) are bound to follow him, despite his political advisors’ efforts to rectify his presidential image. At best, his bravado is likely to negatively colour foreign relations with key trading partners. At worst, he could be paving the way for a full-blown trade war.

Among the many policies that make traders nervous about a Trump presidency, this is the one that should be at the forefront of their minds. While his domestic policy is bound to change, the damage done by his readiness to antagonise – to domestic investment, to companies’ bottom lines and to the greenback as a whole – may be irreparable.

Hillary Clinton

While Clinton can attest to being far more politically experienced than Trump, it’s a claim already proving to be both a blessing and a curse. 

Sanders was the first to highlight how many of Clinton’s current campaign promises are undermined by high-profile positions she’s taken throughout her political career. Trump has made a point of seizing on the same line of attack. Her policies are, he claims, designed to pick up the disillusioned but unlikely to ever actually be implemented. 

Trade U-turn

Accurate or not, Trump’s accusations benefit from a convenient narrative. Take Clinton’s position on trade: she came out in opposition to the Trans-Pacific Partnership – which is bound to have a negative impact on domestic manufacturing and investment – as soon as negotiations came to a close late last year. Only in 2012, however, did she refer to the TPP as ‘the gold standard in trade agreements’.

Such uncertainty on the legitimacy of her position means her trade policy could be detrimental to the markets, or it could be entirely beneficial. For traders, then, this is likely to stave off any major fluctuations as they wait for her to show her hand and commit one way another.

For Trump, meanwhile, it’s a fish-in-a-barrel opportunity: former allegiances could conflict with the hard-line negotiation tactics she promises. 

Wall Street 

Still, it is Clinton, not Trump, emphatically endorsing regulatory laws that will prevent Wall Street from taking excessive risk – despite having been treated favourably by the big banks in the past. More stringent regulatory measures and tax hikes will be reflected in the Dow and other indices, as well as public companies likely to be most affected by a hard-line approach.

With this stance likely to ruffle the feathers of a few prospective backers, she’ll argue that it’s an oversimplification to suggest she can’t be divorced from old loyalties.

Top-tier taxation

Clinton’s tax plan certainly gestures towards a conscious effort to appeal to the underdog. Top-tier earners and corporations will be on the receiving end of a cumulative $1.2 trillion tax increase over the next decade, and those in lower brackets will purportedly be protected from any hikes. Expect some nerves in the markets if her plans to crack down begin to take hold. 

Ambitious spending

But that’s a big ‘if’. Clinton, like Trump, has refused to address restructuring arguably unsustainable entitlement costs. Between this and a potentially overenthusiastic spending plan (which, though largely covered by her tax plans, is still projected to see a $250 billion increase in federal debt), it may not be a question of where her loyalties lie, but one of fiscal feasibility.

Unless she addresses the real expenses in the federal budget, her policies are likely to be written off as idealism. While a government at a standstill may not be ideal for the president herself, it could certainly encourage more bullish sentiment in the financial markets. 

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