Executive Summary
How did Trump win the Presidential Election 2016? Going into the 8 November election, Donald Trump was losing by a huge margin against his main political adversary, Hillary Clinton, in the poll. As the presidential election of the world’s largest economy took place, the world held its breath as the results of the election drew to a close when Donald Trump won the Wisconsin state, bringing him pass the 270 electoral vote required to win the election. Why did some people called this a “freak” results and why is there such an upheaval of emotions around the world and more importantly in the United States of America. This was not an unforeseen major upset which you were led to believe by the mainstream media in US. Majority US media outlets have duped us into believing that Trump’s Campaign is based on hatred for immigrants, racial superiority and plain vanilla disregards to a civilised society. This is all undeniable. However his most important agenda, one which he spent most of his time discussing during his campaign, was conveniently disregarded by the media. His view on international trade was most probably the deciding factor for his victory. No, we are not talking about the “Mexico Wall” that he promised to build. We are talking about the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP). One thing we know about Trump is that he is not for free-trade. So how did his anti- free-trade view won him the election? By restricting good and services across its borders, it essentially force companies to bring their factories back into the US. This will have a direct impact on jobs creation for the blue-collar workers, and this is also where we see the strongest support for Trump. Grouped by income, his strongest support are the middle income working class Americans. |
| These are the Americans with a lower education level as well. Thus it is not surprising that Trump won most of the vote of the middle income blue collar Americans. The deciding Wisconsin state which voted for Trump is a state populated with such blue collars American workers. |
| At certain point of his campaign, many of us were pretty confident that Donald Trump will not get any of the Hispanic or Latino vote due to his perceived racist remarks. For all the attention on him being a racist, the exit polls also showed a different side of the story. Although his supporters from non-white race still lack behind Hillary, he still managed to improve from his Republican predecessor, Mitt Romney. This might also be due to the “Obama-effect” as his renouncement from presidency will impact the support for Democrat from the minority race. |
| This Exit poll by race proved to be pivotal in explaining how Trump was able to win the swing-state of Florida which is traditional populated by Hispanic and Latino. With 29 electoral vote up for grabs, Florida was an important state that both candidates needed to win. Nonetheless, race was less of the deciding factor as people of Florida were more concerned on the economy and voted for a change.
Where will the market head? With the election done and dusted, we shift our focus back to the economy and the financial markets. What does a Trump presidency mean to the market? If we are to take cue from the trading actions in the US equity markets on 9 November (a day after the election), it is signaling that the election was a non-event. Contrary to the dooms day scenario many believed, S&P 500 and NASDAQ were up 1.11%, and Dow Jones Industrial Average was up 1.40%. |
On the longer term basis, things are too vague to call. Given that Donald Trump have a unified Republican Government (Republican wining both House and Senate) for his first 2 years, it will still be hard for him to get his proposal through. After all US is still the leading democratic nation and the US president is not a dictatorship. Having a unified government is one thing, getting his fellow Republicans to support him is quite another. Taking into account the number of congressmen and politicians he has offended during his Republican primaries election, he will first need to make peace within his own party.
| Furthermore policies implementation usually take a long time to pass through and there are always a policy lag time before we see any effect in the economy. That being said, we do see discrepancy in certain market reactions and believe that there will be some volatility in the short run. |
| Post-election overreaction
If one was to look at the closing of the S&P 500 index alone on 9 November 2016, no one would have believed a major event had just occurred in the day where Donald Trump won the presidency race. Everything appeared fine as the S&P 500 index closed higher on the day with a 1.11% gain. However, looking deeper into the different assets that were affected by the election, there was a striking outlier. A Donald Trump presidency would translate into a risk-off environment where Gold should benefit, while Equity markets in general and Mexican Peso would suffer. That was the case initially when news of Trump having a higher probability of winning the election appeared. At one point, Gold was up 5% to a high of $1337, USDMXN was up 13% to a high of $20.77 while S&P 500 Futures was down 4.8% to a low of 2032 point. The correlation between the S&P 500 Futures and USDMXN has been strongly negative until the point where the S&P 500 Futures was halted limit down at the 5% level. The cause of the strong fall in the equity futures and USDMXN was the news of Donald Trump winning one of the early swing state, Florida. Once the dust settled with more certainty of a Trump victory, market rebounded immediately which gave rise to the clear divergence that has been showing up between the S&P 500 Futures and USDMXN. We believe that the rally in the equity market post-election was an overreaction shown by the large divergence between the S&P 500 Futures and USDMXN. |
A short term play on the S&P 500 Futures now would be to trade the closing of the divergence where S&P 500 Futures could fall back to the 2100 – 2090 area.
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Sai Teng covers the global macro research. He has more than 6 years investment experience primarily in portfolio construction and asset allocation. He graduated with Bachelor of Science in Banking and Finance from University of London.
