What if Donald Trump wins the US election?

161107-trump-b — A Donald Trump victory would be an unpleasant surprise

Most of the time as investors, we should be thinking about the long-term.

But if you know that an event is coming up that could give your portfolio a bit of a fright, then I think it's worth being aware of it.

Not so that you can time the market. More so that you can prepare yourself mentally. If you already know that you might wake up to a sea of red when you next look at your portfolio, it might stop you from doing anything too hasty.

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(And of course, if you are a short-term trader, it is a good idea to get your scenarios planned out so you can work out which punts to take and where to put your stop losses.)

So let's look at what might happen when this week's US election results hit the wires

The markets wouldn't react well to a Donald Trump victory

Assuming that it isn't too close to call, or that one of the candidates doesn't throw a massive hissy fit (those are big assumptions, I admit), then we should know who the next president of the United States is by Wednesday.

I'm not going to do anything pompous like formally declaring for one or other of the candidates. I know a fair few Americans read this, but they'd rightly ignore a foreigner telling them how to vote, the same way I couldn't care less about a US pundit's views on Scottish independence.

But regardless of your politics, you'd have to be wilfully self-deceiving to believe that markets would welcome the prospect of a Donald Trump victory. It's pretty clear that investors see a Trump win as being similar to a Brexit vote it would be an unpleasant surprise for them.

That's why, after closing lower for nine sessions in a row, the S&P 500 has just gone through its longest losing streak. And it looks like having a rebound today now that the FBI has decided that the whole Hillary Clinton email business is off the table once again.

Why is this the case? In many ways, Clinton and Trump aren't that different economically. They favour different sectors from one another renewables versus fossil fuels, for example but overall, they would both increase spending, and the US Federal Reserve's monetary policies are unlikely to be significantly different regardless of who wins.

It really just boils down to expectations. Markets don't quite know what to expect from Trump. He's not the standard US presidential candidate. On top of that, he seems to be quite a mercurial chap (that's a polite way to put it). So they need to discount that uncertainty.

In effect, if Trump wins, the market needs to be offered bigger returns in order to invest in risk assets. That means prices have to fall from where they are now.

So if he does win, I'd expect the following to happen: stockmarkets in the US (and therefore, pretty much around the world) would fall hard; the dollar would take a hit too (although not against the Mexican peso, which would fall harder).

Gold would jump. And as for US bond yields this one's a tiny bit trickier because you've got the "safe haven" impulse to invest in US debt clashing with the fact that it's the US you're worried about but overall I'd expect them to rise (ie, bond prices would fall).

As I said, there's no need to fiddle with your portfolio ahead of the big day (I'm assuming you already hold some gold, a good spread of global equities and some cash). I'm just outlining roughly what would happen so you know what to expect.

And if you're a trader type, then going into the election, I'd guess you want to be short the S&P 500, short the dollar (maybe against the yen, which tends to benefit most from safe haven flows), long gold, and short US long bonds.

You'd be able to have a pretty tight stop loss at the upper end, because it'll rapidly become clear if the bet's going to go your way or not. But I won't discuss this any further, because if you haven't traded before, now is not the time to start.

What if Clinton wins?

Biotech and big pharma probably wouldn't like it. Clinton has talked a lot about tackling high drug pricing in the US. More broadly, it would probably set us up for the usual Santa Claus rally in the run up to Christmas as markets relaxed a little. But overall, I wouldn't expect a huge reaction.

Of course, once the dust settles and the long-term implications of whatever the winning line-up looks like (remember that the composition of Congress matters a lot too in terms of getting things done or not getting things done) become clearer, markets may well get rattled again, regardless of who wins.

As I said, both candidates look set to be big spenders at a time when interest rates are wobbling higher. Both are interventionists, neither is particularly friendly to the ideas of globalisation or free trade, and they both inherit a messy bundle of foreign policy challenges.

We'll be looking at what those challenges mean for whoever is the next president of the US in the next issue of MoneyWeek, out on Friday. If you're not already a subscriber, you can sign up here.