If Trump wins, here's how the S&P 500 could react

The U.S. presidential election is still more than four weeks away, but investors have already weighed in, by many accounts.

One illustration of the market’s view can be seen in the S&P 500’s (SPX) 0.7 percent advance the day after the first debate between Hillary Clinton and Donald Trump, a match widely seen as hiking the Democrat’s odds of winning the presidency against her Republican challenger.

The Sept. 27 reaction by the stock market’s broad gauge was chalked up by some to the uncertainty a Trump presidency would bring, and as any Wall Street watcher knows, the market abhors uncertainty. Others point to Trump’s economic plans as cause for alarm among investors.  

Leading in opinion polls after her first debate against Trump, Clinton’s momentum also appears to be increasing heading into Sunday’s second debate, at least if one takes a look at the betting markets, said David Kass, a clinical professor of finance at the University of Maryland’s Robert H. Smith School of Business.

PredictWise, a prediction market aggregator, shows that people with money on the line are betting that Clinton will win, with a probability of 80 percent,” noted Kass. “PaddyPower, a London-based betting parlor, is indicating that Clinton has a 73 percent probability of being elected, an increase from 63 percent prior to the first presidential debate.”

 A recent survey of the 45 living former members of the President’s Council of Economic Advisers found zero support for Trump’s presidential bid, which Microeconomic Advisers, an independent research firm, noted could be due to Trump’s economic proposals, including: 

  • A large tax cut -- rather than revenue-neutral reform. With the economy close to full employment, many economists believe that would increase inequality, force up interest rates and exacerbate an already unsustainable fiscal posture while not generating the large “supply side” expansion promised by Trumps’ advisers.
  • The deportation of 11 million unauthorized immigrants, about 7 million of whom work, and the curtailment of future immigration that, according to the Bureau of the Census, would otherwise account for more than half the growth of U.S. population (and labor force) over the next decade. This is despite much academic research suggesting that immigrants actually expand the size of the economy and don’t displace native-born workers.
  • The imposition of steep trade tariffs on imports from China and Mexico, which could trigger a destructive trade war. Trump threatens to withdraw from (or abrogate) existing trade agreements and ongoing trade negotiations, and, perhaps, even withdraw from the World Trade Organization.
  •  Trump’s criticism of the conduct of monetary policy in a manner that seems to threaten the independence of the Federal Reserve.   

The Microeconomic Advisers analysts, Joel Prakken and Chris Varvares, conclude that the S&P 500 would rally 4 percent if Clinton wins the election, and conversely would sink 7 percent if Trump emerges victorious.