What the Markets Can, and Can’t, Tell Us About a Trump Presidency
There was a moment on Tuesday night when it seemed as if the world economy might collapse along with Hillary Clinton’s chances of becoming President. Stock futures—a bet on how the stock market would react when it opened on Wednesday morning—fell everywhere. The Dow Jones Industrial Average had its largest rise in months on Monday, when investors seemed to believe a Clinton victory was all but guaranteed. Then, on Tuesday night, Dow futures predicted a fall of more than eight hundred points, which would be the largest single-day collapse on record. The S&P 500 futures fell five per cent, a fall so precipitous that it triggered a freeze in trading. Markets in Asia and Europe were already open or soon would be when the world learned that Donald J. Trump had certainly been elected, and they fell straight down. Bloomberg News published a chart showing a rare event: every market, everywhere, collapsing as one. Currencies, too, dropped. Most notably, the Mexican peso fell more than ten per cent, an unimaginable drop in a single day. Every prognosticator, and the markets themselves, had been expecting one of the worst days of trading in history in the event of a Trump victory. It seemed reasonable to expect that Wednesday would bring the instantaneous disappearance of trillions of dollars of value worldwide, as investors recalibrated their expectations downward.
But if the election has taught us anything, it is to question expectations. When the markets opened in New York, there was no panicked selling, and by noon stock prices had risen by more than one per cent. Politico reported that Treasury and Federal Reserve officials were monitoring the situation closely, prepared to take extraordinary action, if needed, to save the U.S. economy from free fall. They had no need to take any action. What do we make of this?
There were specific subplots. Pharmaceutical companies and private prisons saw their values rise, presumably rooted in a belief that President Trump will abandon efforts to rein them in. Gun stocks fell—a sign that Americans no longer fear a gun-control advocate in the White House. But the over-all movement of the markets was not rooted in specifics. In times of surprising, confusing news, markets quickly become solipsistic: trading not on what each trader believes will happen in the real world but on what each trader guesses all the other traders are thinking. Or, as John Maynard Keynes wrote, “We devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.” Figuring out what the average trader thinks the average trader thinks can take a bit of time and trial and error. Thus huge swings downward and upward are often not signs of a changing assessment of the world so much as feints this way and that until everyone stops moving for a moment. This doesn’t mean there isn’t information in the steady rise of stock values throughout the day. The lack of a sustained collapsed or a stampede toward gold—which is where people run in times of fear—and the relative stability of Treasury bonds suggested there was no panic about the long-term viability of the U.S. economy. Global investors, at least for now, seem persuaded that we don’t face a sudden, sharp economic disaster.
That is where the good news ends. The markets are bad at measuring longer-term threats. At base, our way of life is rooted in a series of explicit and implicit commitments that the United States has made with much of the world since 1946. We will maintain our currency and responsibly pay our debts so that, instead of gold, the world can have the dollar as a safe base upon which all other economic activity can take place. We will fund and manage global institutions that, while far from perfect, provide some sense of order and fairness to global business. These include the United Nations, the World Bank, the International Monetary Fund, and the World Trade Organization. We will use our Navy to make the seas safe for commerce and our military might to insure that the world’s developed nations see their interests and ours as intertwined. Trump has attacked every one of these foundations. How much should you pay for Apple stock, say, if we have to worry about the dollar plummeting in value and the President declaring a trade war on China, which is both Apple’s chief supplier and its fastest-growing market? There is no financial model, right now, for that many levels of structural uncertainty.
Markets are designed to make relatively minor adjustments on a fundamentally sound base. They never perform well when the base itself is under assault, as it was during the financial crisis of 2008. There was a lot of talk, leading up to that crisis, about the various worries in the global economy—subprime lending, China’s huge cash surplus, overleveraged banks. But it took years for most investors to understand fully that these weren’t normal problems in a functioning market. When they finally understood that the market had ceased being normal and couldn’t function, it was no longer possible to deal with it in the normal fashion of selling lousy stuff and moving money to assets that had more promise. The markets were themselves frozen and incapable of responding, which made the already toxic assets even more dangerous.
Donald Trump’s proposed policies are, in this technical sense, toxic. Of course we don’t know yet how his confused policy proposals will be presented to Congress or whether a Republican Congress will see itself as a check on his worst impulses or a booster of them. But what he said on the campaign trail suggests that there could be many unintended economic consequences (and some terrifying intended ones). The repeal of Obamacare, alone, would force many people to forgo their riskier, entrepreneurial ambitions for the safety of a job with a health plan. Curtailing immigration will redirect the world’s most ambitious citizens elsewhere. A trade war with Mexico and China would be damaging in ways that are hard to fathom or measure. Trump’s tax plan will turn America’s serious but manageable debt burden into a crisis weighing on future generations.
Economists distinguish between the words “uncertainty” and “risk” carefully. To them, risk is measurable, knowable, discussable. You and I might have different views of the chance of, say, General Motors doing better next year, but we come to our different understandings using similar tools, similar vocabulary. Uncertainty refers to that which can’t be measured or defined, the darkness about which we know nothing. We are, once again, in a period of deep uncertainty. The future is, literally, inconceivable to us now.
For more post-election coverage, read David Remnick on an American tragedy, Adam Gopnik on talking to kids about Trump’s victory, Nathan Heller on Election Night with Clinton’s supporters at the Javits Center, Evan Osnos on Trump’s supporters, Amy Davidson on Trump’s stunning win, and Benjamin Wallace-Wells on who is to blame, and Hillary Clinton’s concession speech.