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Trump's win turns stock market into shock market

Uncertainty in global markets
Uncertainty in global financial markets after Trump's victory 01:18

GOP presidential candidate Donald Trump delivered a huge electoral upset over Democratic rival Hillary Clinton with a surprisingly strong showing in “Rust Belt” states thanks to his touting of economic nationalism to regions ravaged by the headwinds of free trade and globalization. 

Markets descended into chaos almost as soon as the close results from states like Florida, Ohio and North Carolina trickled in, sending Dow futures and Asian stock prices sharply lower as investors panicked over uncertainties on trade, immigration and geopolitical tensions.

At one point, Dow futures plunged more than 4 percent and Japan’s major index nosedived more than 6.1 percent, its largest drop in years. The Mexican peso likewise tumbled and investors looking for safe assets bid up the price of gold.

Donald Trump's historic win 00:55

Watch for a triggering of circuit breakers when U.S. markets open on Wednesday. The New York Stock Exchange’s “Level 1” breakers are hit on a 7 percent decline, which is a roughly 1,280-point drop for the Dow.

It’ll likely resemble the fallout from this past summer’s Brexit all over again. Only bigger. And it’ll likely continue.

Also crashing are the odds of the oft-teased December rate hike from the Federal Reserve. Assuming financial market pressure continues as New York markets open for business -- which is all but assured -- look for Fed officials to soothe nerves by downplaying chances of a policy tightening until financial market turmoil ends, as they did earlier this year in the wake of the Brexit uncertainty.

Stepping back, the election result is a massive surprise (few pre-election polls showed Trump ahead in support) and a big electoral mandate for Republicans, who are on track to maintain control of the Senate and the House of Representatives. The last time Republicans held all three branches of power (White House, Senate and House) was in 1928 when California Republican Herbert Hoover beat New York Democrat Al Smith.

It will surely have major implications for the drivers of the stock market: Earnings, economic growth and interest rates, as well as investor sentiment. For the last year and a half, Democrats and many Republicans have been using scare tactics to warn of the consequences of Trump rising to the presidency. So, the near-term panic is likely to be acute and powerful.

This is made worse by the technical fragility of the stock market: The Dow has been flirting with the 18,000 level since 2014, corporate earnings have been falling for a year-and-a-half, and the economy is tepidly running just above stall speed. The Russell 2000 small-cap stock index returned last week to levels not seen since early July before rebounding.

What comes after will depend, in large part, on Trump himself in the days and weeks to come. Who will be his cabinet picks? What tone does he set with China and Mexico on trade policies and his border wall? Will he reconcile with Fed chairman Janet Yellen?

And let’s not forget that Trump’s economic policies amount to a massive fiscal stimulus since they would add to the national debt, according to the Committee for a Responsible Federal Budget. This could be a much-needed boost to the economy, as tax cuts and infrastructure spending lift GDP growth.

Time will tell. But for now, wild market swings are likely as investors and traders respond to the world’s largest democracy delivering a massive shock to the political and economic establishment.

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