U.S. election 2016

Donald Trump won. Now the market freak-out begins.

Donald Trump has been elected to oversee an $18 trillion economy. Get ready for volatility.

Traders from BGC, a global brokerage company in London's Canary Wharf financial centre react during trading June 24, 2016 after Britain voted to leave the European Union in the EU BREXIT referendum. (Russell Boyce/Reutres)

(Russell Boyce/Reutres)

It’s been eight years since the U.S.-spawned financial crisis unleashed misery around the world. Now angry U.S. voters have thrown another giant wrench into the sputtering machinery of the global economy: president-elect Donald J. Trump.

With the S&P 500 Index posting its biggest two-day rally since June in the run-up to Tuesday’s vote, investors were clearly betting on Hillary Clinton to win the White House based on the Democratic candidate’s recovering poll numbers in the campaign’s final days. Instead, Trump’s surprise, come-from-behind victory has set the stage for dramatic sell-off when North American markets resume trading Wednesday morning, and likely in the days and weeks to come—not unlike the big swoon that followed the U.K.’s unexpected Brexit referendum results last spring.

The signs are all there for extreme short-term volatility. Futures for the Dow Jones Industrial Average plunged more than 700 points, or around 4.1 per cent as Trump’s victory emerged, while S&P 500 futures fell by five per cent. If the S&P 500 falls by that much when markets open, it will wipe out the equivalent of nearly $1 trillion in investors’ wealth, according to an analysis by Citigroup. Meanwhile, the price of gold, seen as a safe haven, jumped close to US$50 overnight.

SP500 Trump

The loonie will be in for a rough ride, too. Many of Trump’s key economic policies, from ripping up trade agreements to levying huge tariffs on U.S. imports, suggest an America that will no longer be open for business—at least not to the same extent. That doesn’t bode well for Canada, given the U.S. is our biggest trading partner, with more than US$670 billion goods and services flowing across the border last year.

But all of that is just the beginning. Over the coming weeks and months, investors and businesses everywhere will need to wrap their heads around the idea that a bombastic real-estate mogul and former reality TV star, with a clear disdain for demonstrable facts and a bizarre sensitivity about the size of his hands, will now play a key role in deciding the future path of an $18-trillion economy, the world’s biggest and most important.

Janet Yellen, chair of the U.S. Federal Reserve, speaks during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, D.C., U.S., on Wednesday, Sept. 17, 2014. (Andrew Harrer/Bloomberg/Getty Images)

Janet Yellen, chair of the U.S. Federal Reserve, speaks during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, D.C., U.S., on Wednesday, Sept. 17, 2014. (Andrew Harrer/Bloomberg/Getty Images)

One sure victim of Trump’s surprise victory is the U.S. Federal Reserve’s hopes of escaping the low-interest rate trap it unwittingly laid for itself following the 2009 recession. The Fed was expected to raise rates in December as the U.S. economy continues its long, shaky recovery. But now amid the uncertainty generated by Trump’s unlikely win, the Fed is almost certain to stand pat. Also uncertain: the future of U.S Fed chair Janet Yellen, whose monetary policies were criticized by Trump on the campaign trail and whose term is up for renewal in early 2018. If Trump decides to replace her (assuming she doesn’t resign first), it will raise serious question about the central bank’s all-important independence, which is key to America’s economic stability.

Longer term, many argue Trump’s policies, if actually implemented, could pose a serious risk to the U.S. economy as well as those of the countries with which the U.S. does business, including Canada. “His threat to rip up existing treaties and impose new tariffs—even if there are limits to what can actually be accomplished under executive authority—would disrupt global supply chains, jeopardizing the integrated international trade system that has been the key foundation of decades of global growth and prosperity,” warned Stephen Rogers, an investment strategist at Investors Group, in a white paper released before Americans cast their ballots.

On the campaign trail, Trump’s protectionist rhetoric knew no bounds. He regularly railed against the 12-nation Trans-Pacific Partnership deal, spearheaded by the Obama administration and signed by Canada, and promised to tear up the North American Free Trade Agreement, or NAFTA, which he dubbed “a disaster.” While Trump has suggested that renegotiating trade agreements and levying stiff tariffs against cheap Chinese and Mexican-made goods would create American jobs, many argued the exact opposite is a much more likely scenario. “Closing the borders would work against consumers, import companies, exporters and the broader economy by weakening productivity,” wrote economists Francois Dupuis and Francis Genereux at Desjardins Economic studies in a Nov. 4 report.

Trump’s other economic policies, at least on their face, are no less troubling. While his promise to cut taxes, mostly to the benefit of upper income earners, will probably lead to a short-term boost in U.S. GDP growth, it also threatens to leave a significant shortfall in federal tax revenue down the road—as much as $6.2 trillion over the next decade. That, in turn, could lead to an explosion in U.S. government debt and pave the way for higher, economy-dampening interest rates charged to businesses and consumers. Even Trump’s signature promise to build a giant wall along the Mexican border, as well as clamp down on immigration, could carry economic consequences if the policies put a dent in the supply of U.S. labour. Altogether, the nonpartisan Tax Policy Center, a joint venture between the Urban Institute and Brookings Institution, argues that the policies of president-elect Trump could lead to a three to four per cent drop in GDP over the next two decades.

Prime Minister Trudeau speaks with President Obama ahead of his announcement regarding Canada's contributions to the fight against ISIL. February 8, 2016.

Prime Minister Trudeau speaks with President Obama ahead of his announcement regarding Canada’s contributions to the fight against ISIL. February 8, 2016.

With Trump’s win, Prime Minister Justin Trudeau’s vision of resurrecting the Canadian economy has just been called into question. While Trump’s stance on issues like the Keystone XL pipeline bodes well for the oil and gas industry, the risks posed by a U.S.-led slump in global trade would likely far outweigh the increased volumes of crude that would flow across the border into the Gulf of Mexico—especially at today’s depressed prices. And if Trump actually goes through with his tough talk about ending NAFTA, which is now woven into the North American economy, there’s a very real possibility Canada could be plunged back into a recession.

None of this is chiselled in granite, of course. “We simply cannot know how much (or, more probably, how little) of a candidate’s proposals will ever remotely see the light of day,” wrote BMO chief economist Doug Porter in a recent note that pointed to the pushback U.S. presidents often receive from Congress. “Thus, it is extremely dicey to jump to quick conclusions over what impact the election will have on the economy.” In fact, Porter argues the only “no-doubters” in a Trump presidency is a slide in the Mexican peso and the shelving of a Fed rate hike come December.

If history is any guide, even the stock market swoon could be mercifully short-lived. Porter notes that the “deep dive” in equities following Britain’s surprise vote to leave the European Union—the most analogous recent event to Trump’s shocking presidential victory—was a temporary phenomenon. The U.K. economy has also held up better than most expected. But that could also be because the U.K. has yet to officially proceed with its EU divorce, suggesting the real pain is yet to come.

Trump is, without question, one of the most unconventional and unpredictable candidates to ever win the White House. But while there are plenty of flashing red lights for the U.S., Canada and beyond, investors can take comfort in the fact that we tend to give politicians—even U.S. presidents—too much credit for influencing the economy. “To paraphrase Richard Nixon, the U.S. economy is nothing more than 150 million Americans getting up and going to work every day,” Porter says. “It takes some serious changes by policy-makers to move the dial on that powerful underlying force.”

One thing is clear, though: Trump’s fingers—whatever their size—are now mere months away from grabbing the controls.

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