The devil the market doesn’t know

TAnimal Spirits he amount that Canadians talk about the U. S. election, you’d think we were voting in it. We seem to forget that choosing the next president of the United States is up to, well, the people of the United States.

Yet there’s no doubt that this is an important election, even to those outside the United States. After all, the U.S. is the most powerful country and the largest economy in the world. More importantly (to us), it’s Canada’s longtime friend and ally, the source of most of the cultural product we consume, an important export market and our largest trading partner. So, yeah, we care. Should we care as investors, too? Well, one way to answer that is to look at the next important instalment in the seemingly unending election watch: the first presidential debate, airing on Monday night, between Democrat Hillary Clinton and Republican Donald Trump.

Now, political debates these days are hardly on the level of Lincoln and Douglas. In this one more than others, given the participants, we can expect gaffes, highly telegraphed zingers, accusations of prevarication and unAmericanism, some anger, maybe some yelling. From an investor’s point of view, it would be easy to write off the whole thing as political Grand Guignol.

Yet there are matters of real substance to Canadian investors in each candidate’s platform, and the debate will provide an opportunity to gauge — how to put it? — the level of ambition they have for some of their more provocative policy proposals.

The most pertinent for Canadians is what they plan to do with NAFTA. Clinton, who once clearly supported the trade deal ( her husband signed it into law, after all), has now decided that it should be re- evaluated and maybe “adjusted.” What does that mean, exactly? Maybe she will illuminate during the debate.

Trump, at least, has been clear on NAFTA: he wants to terminate it. Most of his NAFTA antipathy is directed at Mexico, against which he would like to build a “beautiful” wall. There’s not much mention of America’s largest trading partner ( us) in all of this, but the scrapping of NAFTA would be for Canadians the economic equivalent of the U. K. leaving the European Union. ( What would we call America’s departure? Amexit? Trexit?)

On t he o t her hand, Trump’s policies tend to flap about in the political breeze, and it’s possible, though unlikely, he will soften his antitrade stance in the debate to appease big business. It’s also possible, and more likely, that should he become POTUS, Trump will never really get around to taking on America’s alleged trade enemies. ( Eight years ago, a very different presidential candidate vowed to renegotiate NAFTA and never did. His name is Barack Obama.)

Much the same can be said for just about every major plank in Clinton’s and Trump’s platforms, especially their economic ones.

For instance, Trump has promised to slash corporate and personal income taxes — but if the Democrats end up controlling the Senate, as well they might, those reforms will be hard if not difficult to implement. Clinton, among other spending schemes, wants to give kids free college tuition and pay for it by hiking corporate taxes. Even with a Democratcontrolled Senate, those promises are not done deals, should she win; with a Republican- controlled Senate, they are probably dead in the water.

That’s one reason that when it comes to stock market perception, what matters about the debate isn’t its substance so much as its outcome — that is, who “wins” it. Monday night’s champion is likely to get a boost in the polls, simply by dint of winning the debate. And that could spell either relief or trouble in the markets — relief if Clinton wins, and trouble if Trump does.

Historically, the U. S. stock market tends to do better when the incumbent wins the election. That’s because markets hate uncertainty. Despite some of her busines sun friendly promises, the working assumption is that a Clinton administration would be a continuation of the Obama administration, give or take a few changes on the margins. At the very least, she’s the devil markets know. So if Clinton wins Monday’s debate, watch for the recent market upswing to firm.

By contrast, Trump is an unknowable. Just by dint of being new, a Trump administration is a risk factor for markets. But that risk is heightened by the man himself — in particular, his unpredictability. Not only has he never governed before, but many of his policy positions are vague. He’s capricious. And he has a predilection for shifting positions on a dime.

So if Trump wins the debate, we can expect more volatility in the markets, with a bias toward the downside. After all, with so much uncertainty already out there (monetary policy, Brexit, terrorism), who needs a swivel chair in the Oval Office?