Could President Trump cause another Great Recession?

Republican presidential nominee Donald Trump shakes hands with Democratic presidential nominee Hillary Clinton following the second presidential debate at Washington University in St. Louis, Sunday, Oct. 9, 2016. (AP Photo/Patrick Semansky)

Being Canadian, I am not trying to influence any of my American readers on who they should vote for next Tuesday. However, my investment portfolio is heavily invested in the U.S. stock markets, I shudder at the thought of what could happen under President Trump. Naturally enough, investors and analysts hate uncertainty. Hillary Clinton largely represents the status quo. Mr. Trump is more like Forrest Gump’s box of chocolates “You never know what you’re going to get.”

What exactly happens the day after? To markets? To the economy?

The conventional wisdom is that a Trump victory would lead to a swift, knee-jerk sell-off. Many investors will choose to sell stocks and ask questions later. The Mexican peso would most likely fall on fears of a trade fight along with ETFs that contain Mexican stocks. Some insurance companies could tumble on the uncertainty of what would happen if Obamacare was repealed.

A worst case scenario is Mr. Trump’s anti-trade policies would send shock waves around the world. Add a stock market crash and it would plunge the world into recession. Europe’s economy is very fragile and it wouldn’t take much to tip Europe back into a full blown recession. This would lead to a serous banking crisis that could spiral into emerging markets.

The biggest test for the stock markets might be pegged to the future leadership of the Federal Reserve. There is much more uncertainty regarding who Trump might nominate, though he has made it clear he would not re-nominate Chair Yellen.

Now, a handful of economists have suggested that despite all of the promises made by both candidates, odds are high that whoever the next president is, they will preside over a recession. They argue that we are in the second-longest bull market of all time and the eighth year of this economic expansion. It is hard to believe that we will go through the next four years without a hiccup. If merger activity is a gauge of the market’s cycle, the recent spate of deals suggests we’re closer to the ninth inning than the first.

In reality, it’s impossible to predict how the markets would settle after an initial sell off. It will take time for investors to truly make sense and “math out” how his policies would affect the economy. Now, Trump’s bark will be a lot worse than its bite in terms of actual implementation of his anti-globalization position. Hopefully, a split in the congress and the senate will stop Trump from carrying out any outrageous election promises.

Am I worry about the U.S. election? Not really because I am an option trader. I have sold covered calls to protect most of my U.S. stocks. I have sold only a few cash secured puts on stocks that I am comfortable holding long – term. Plus, I have some extra cash just in case of a market sell-off. I am very comfortable switching from selling cash secured puts to buying puts if there is a bear market.

Where am I going to be next week? On vacation from the markets in Orlando, playing golf with my golf cronies. Hoping that they don’t ask for any financial advice and looking for another hole in one.

hole-in-one

 

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