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Two different ways a Trump presidency could affect the markets

Credit: Gage Skidmore/Wikimedia Commons
Credit: Gage Skidmore/Wikimedia Commons

Ahead of Monday’s highly anticipated presidential debate, analysts—including Morgan Stanley’s Michael Zezas—say the markets are not anticipating a Donald Trump victory.

But that could change soon, especially since Trump has experienced recent gains in the polls over Hillary Clinton. If those gains hold, or even improve, then the markets may begin to anticipate the early priorities Trump has laid out, according to a new Morgan Stanley note led by Zezas.

Specifically, Zezas argues that Trump will have both the motive and opportunity to act on tax and trade reform in the early days of his presidency, given that he may face less resistance on these two issues than he would on others. Both these priorities have implications for the markets.

If a Trump presidency moves from “policy incrementalism” to real action on proposals, there could be some potentially disruptive consequences.

The “accidental stimulus”

In this scenario, Trump does not take immediate action on trade but instead decides to move forward with tax reform because it would be an “easy win,” as Morgan Stanley notes.

“While we do not expect Republicans, at least in Congress, to sell a tax cut as stimulus in the textbook sense (i.e.,a near-term increase in government deficit), it could be effectively so in reality,” the Morgan Stanley note explained.

This could lead to a “Brexit-like” outcome for markets, Morgan Stanley explained: “We think investors should, for example, at least consider the possibility of a Brexit-like outcome for markets in this scenario, where a Trump win is initially jeered by risk markets based on heightened uncertainty, but recover over time when the ‘accidental stimulus’ becomes apparent.”

‘Fortress America’

A centerpiece of Trump’s campaign rhetoric has been protectionism and pointing to trade deals as “disasters,” supporting his likely push for new measures. As Morgan Stanley notes, Trump could attempt to unilaterally withdraw from trade agreements like the North American Free Trade Agreement (article 2205 of NAFTA would let the US withdraw with six months’ notice).

Morgan Stanley says in a reality where Trump pushes forward these measures—a “fortress America scenario”—the market could have a negative reaction.

If he were elected president, Trump would have some influence over US trade deals. Congress has delegated authority to the presidency to regulate trade via several statues, the Peterson Institute has noted.

For example, under the Trade Act of 1974, the president can impose temporary tariffs of up to 15% for up to 150 days against a country if there’s a large balance of payments surplus. Under the Trade Expansion Act of 1962, the president can impose tariffs or quotes if there’s a finding of an “adverse impact on national security from imports.”

Tariffs would be disruptive to the economy, according to Morgan Stanley, especially if paired with renegotiation of trade agreements like NAFTA. And even if these changes face legal scrutiny over time, Morgan Stanley explains the short-term impacts could affect the market significantly.

The bottom line: Ultimately, tension is high between the potential positives of Trump’s tax proposals versus the risks of his protectionist policies. Ultimately the uncertainty of how it will all pan out may be the biggest near-term risk to the market.

Nicole Sinclair is markets correspondent for Yahoo Finance.

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