Trump vs. Clinton: Does It Matter?

The Fed rate is a bigger issue for investors than the presidential election outcome, sources say.

After a historic (and often anxiety-provoking) election, Americans will finally choose their next president today. Hillary Clinton or Donald Trump—how will the outcome affect investor portfolios?

Many investors are counting on a Clinton presidency, wrote NN Investment Partner’s Patrick Moonen in a blog last week. This result is “generally expected not to have a big effect on financial markets,” he added. But a Trump victory can’t be ruled out.

“It is important to note that Brexit odds were at 24% when the [European Union] referendum polls opened on 23 June and fell as low as 11% when the polls closed. This puts Donald Trump’s odds of roughly one in four into perspective,” wrote Global Equity Strategist Lars Kreckel in a recent Legal & General Investment Management note. “Stranger things have happened.”

While a Clinton victory is the “base case” for most investors, Moonen said investors “need to be prepared and hedge for the alternative outcome, which, if it occurs, may lead to an initial sell-off in risky assets, especially in emerging markets.”

But regardless of who wins, NEPC Partner Christopher Levell told CIO he remains optimistic that the long-term effect on markets will not be extreme. Although a Trump win would be more surprising based on polls, he predicted markets would normalize quickly after an initial sell-off.

While political events can fuel short-term market volatility, it’s market fundamentals that ultimately shape investment returns, NEPC noted in a recent white paper.

“Clearly any election has the potential to cause an increase in market volatility,” agreed Bryon Lake, head of Invesco PowerShares EMEA, in a separate note. “This can be seen during election cycles like the one we are currently seeing in the US where an incumbent isn’t running.”

Over the last four US general elections, the S&P 500 index’s performance has been “mixed,” he added.

In Levell’s opinion, investors are more focused on the Federal Reserve than the election, as a federal funds rate hike of 25 basis points is expected in December.

“I think the Fed is more in the driver’s seat in the near term,” he said, especially when it comes to currency strength.

In its October Risk Rotation Index, NN Investment Partners found that institutional investors view a Fed rate rise as the biggest threat to their investment portfolios. A Fed rate increase was regarded by 44% of respondents as a “significant” risk for their portfolios, followed by inflation (43%) and the election (38%).

Still, election concerns remain. “Markets outside the US would not celebrate a Trump victory,” wrote Hermes Investment Management’s Gary Greenberg in recent note. Global stocks and bond prices would “tumble” as the result of a high budget deficit, new tariffs, exit from the World Trade Organization, and trade war with China, he said—while these same factors could lead to higher interest rates and a stronger dollar, “neither of which are associated with strong emerging market stock markets or currencies.”

Rising yields on US treasuries would also cause those on emerging market sovereign debt to climb higher, he added.

“Trump’s bombastic politics may be ugly,” Greenberg concluded, “but the economic consequences of him governing the world’s largest economy would be worse.”

Related: How Political Ideology Affects Hedge Fund Performance, How a Trump Win Would Shake Up Asset Management