M. Ray Perryman; Brexit – On Steroids!!

A television screen on the trading floor at ETX Capital in London displays a news channel showing President-elect Donald Trump making his victory speech on Nov. 9, 2016.  Bloomberg photo by Chris Ratcliffe.

The results are in and Donald Trump has been elected as the 45th President of the United States in a surprise victory. Despite the polls showing Hillary Clinton to have a slight but consistent and sustained lead, Donald Trump pulled off key wins in swing states such as Florida, Ohio, North Carolina, Wisconsin, and Pennsylvania to end up with the majority of the electoral votes.

While it is much too early to determine what a Trump Administration will ultimately look like, we do have some guidance from recent history about the near-term effects – BREXIT ON STEROIDS!! Whenever there is uncertainty on a global scale, markets typically respond accordingly, especially when adjusting to surprising events. Overnight, futures for the Dow Jones Industrial Average fell as much as 800 points and the S&P 500 dropped 5% as investors responded to updates about the election. Massive selloffs occurred throughout the world as returns started to come in. Asian markets fell sharply as indexes in Hong Kong, South Korea, and Japan fell between 3-5%. European stocks also dropped sharply, and the Mexican peso was off 11% before the election was called. Most of the losses were subsequently recovered, which is also not surprising.

Although market volatility is typically about twice the normal pattern on the day after an election (a fact which has absolutely no predictive power about the following twelve months), the Brexit experience is useful because of its recent vintage and its similar nature. Both Brexit and Mr. Trump’s election reflects surprising (more aptly, shocking) populist revolt in a major advanced economy. After Brexit, markets initially plummeted, recovered quickly, and have since been hypersensitive to any new information about an event with an uncertain future. We will likely see the same pattern in the coming months.

Irrespective of whether you liked Secretary Clinton’s proposals, they were predictable, incremental, and colored inside the lines of typical public policy. Mr. Trump’s do not, and markets are not fond of uncertainty. Thus, investors will tend to try to read meaning into everything, parse every word and deed, and react accordingly. The difference is that, while Great Britain is 3% of the global economy, the US is 25% of world business activity and the linchpin of the international financial system. Hence, the reactions will be exaggerated accordingly.

- FWBP Digital Partners -

The bigger question, of course, is the longer term economic consequences of President Trump’s tenure. That is also a source of mystery. Former New York Governor Mario Cuomo famously said that leaders “campaign in poetry” but “govern in prose.” In Mr. Trump’s case, he tended to campaign more in angry sound bites, and it remains to be seen how he governs. His prescriptions were often inconsistent, but the major ones, if truly implemented would be disastrous. If the US were to suddenly begin deporting people by the millions, denying rights to millions of citizens, cancelling trade agreements, failing to honor treaties, dismantling the health care system, and a dozen other proposals shouted out loud, we would see an economic calamity that would make the 1930s look like a walk in the park, not to mention a social and human crisis of even greater proportions.

In the prose of governing, however, that is not how things work. Whether spoken in poetry or angry sound bites, the most provocative aspects of a campaign are invariably tempered by the system of checks and balances that our Founders provided. Presidents do not have unlimited powers, and there is ample statesmanship and common sense among the leaders of both parties. The Union has survived challenges that were much more daunting than a potentially unpredictable Presidency, and it will do so again. Despite our political discord and divisions, our economic and political institutions are the envy of the world and a source of great stability. We had an election on Tuesday, and we went to work on Wednesday. That is a treatment for our strength, which will endure. Speaking of endurance, we can take comfort in the fact that we can now enjoy a respite from political ads and punditry. That, in and of itself, should be a source of great joy and optimism!!

Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.