In my post last week about the election and financial markets, I wrote that it was too early to worry about what the candidates are likely to do if elected. That remains true, but the New York primary results suggest it’s not too soon to think about what the rest of the race might look like—and what that might mean for the economy and the markets.
With Donald Trump and Hillary Clinton both convincingly winning New York, it looks more and more likely that they will be the nominees for their respective parties.
What would a Clinton vs. Trump race mean?
From my view, it depends on how much the pairing restricts the potential policy discussion both during and after the election. With Clinton, you get a middle-of-the-road, center-left politician who is unlikely to initiate or champion significant changes. Policy under Clinton isn't likely to change much from the Obama years—and may move even closer to the center. This would help reduce policy uncertainty on the Democratic side of the race and should be broadly supportive of the economy and markets.
On the Republican side, John Kasich and Ted Cruz offer fairly standard and well-understood policies from the right of center, but Trump isn’t adhering to the traditional framework. If he gets the nomination, he will have to choose between moving closer to Republican orthodoxy or staying the course, which could introduce additional uncertainty into the economy.
To give an example of how that could play out, there is currently a bill pending in Congress that would allow U.S. courts to hold Saudi Arabia responsible for 9/11. For geopolitical reasons, presidential administrations since 9/11 have embraced the Saudi government, and the Obama administration is opposing the bill, which could threaten the U.S.-Saudi alliance. Saudi Arabia is so enraged by the possible legislation that it has threatened to dump all of its U.S. assets if the bill passes.
Which side of the issue will Trump come down on? This is just one of many questions where presidential candidate Trump's position could well differ from that of a more traditional politician.
Is Trump starting to tone it down?
Trump’s influence on the markets will depend on which road he chooses to go down. Thus far, his appeal has been largely that he is not, and does not act like, a typical politician. There are good reasons to expect potential disruptions during the campaign and to fear rising uncertainty.
There are signs, though, that Trump may be shifting to a more traditional political model. He has said he is aware of the need, at some point, to do so, and his speech after the New York primaries was much more restrained than expected. The Trump of the early primaries might not end up being the Trump of the late primaries, or of the national campaign.
So there we have it. New York provided us with reduced uncertainty on one side, as well as the real possibility of reduced uncertainty on the other. On the whole, from a financial markets perspective, this was a good result. On to the next round of primaries!