Love him or hate him, we have to give serious thought to the 'what if' scenario in which Donald Trump becomes the GOP nominee.
It's hard to believe, but 2016 is upon us and Donald Trump is still in the limelight of the Republican presidential race.
A year ago, many predicted Mr. Trump would put his foot too far into his mouth at some point and fall out of the race with a bang. That foot has been inserted plenty of times, often intentionally, but not to his demise. In fact, his mistakes have sometimes contributed to his rise.
Love him or hate him, now that we have come this far, we have to give serious thought to the 'what if' scenario — What if Mr. Trump becomes the Republican nominee?
And further still, what if his 'say anything, political outsider persona' kept on working and the country embraced him as our next president? What could this mean for the markets? For advisers?
SHOOTING FROM HIP
On the good side, Mr. Trump wants to address many of the issues our country is having by the simple method of fixing our economy. How? By growing it faster than before. How? I'm not so sure, and I don't know if he knows for sure either. More information will have to come out here, but indeed if Mr. Trump has found economic fertilizer, positives could grow over time.
On the other side of the coin, Mr. Trump injects a host of risks. Being an adviser, I know one thing for sure, and that is the markets don't like uncertainty. If I had to use one word to describe how Donald Trump would be perceived by the markets, it would be exactly that one: uncertain.
Imagine the markets trying to react to what Donald Trump is saying day to day. One of the best things about the markets over time is they figure out how to play by a set of rules, almost regardless of what those rules are.
Rules change, markets adapt, we move on. To be sure, most of Mr. Trump's policies and thoughts lean towards a pro-market point of view. That's not the problem.
The problem is the inconsistency of his positions and his communication around those positions. His positions may be perceived as one thing today and flip over to being another tomorrow because of Mr. Trump's shoot-from-the-hip style. This newly added uncertainty may lead to a fresh element of risk for the markets.
RISK PREMIUM
Over time, market participants earn the market risk premium as a reward for the risk they take on. If Mr. Trump is elected and the markets decide this adds risk, the market risk premium can go higher to compensate for that risk. The only way the premium adjusts quickly would be to see a drop in market prices. You can imagine what that would mean for advisers in the short term. A flat market can be tough enough, but if we add a sharp drop at the end of it, say hello to more nervous clients and stress, and goodbye to some assets.
Now even with Mr. Trump maintaining his position in the polls, the likelihood of his getting all the way to the presidency is in doubt. After all, there is growing talk within the Republican Party that even if he were to be the front runner for the nomination, the party would pursue a brokered convention and block the pathway. The problem with this thought pattern is everyone assumed that Mr. Trump would be gone by now. He's more resilient than once thought, so we should be ready for anything.
There's a way that Mr. Trump's verbal shock-and-awe tactics could impact the markets even more than if he were sitting in the White House. How so?
What if every word of Mr. Trump's was so important for the markets that his remarks needed to be eloquently crafted to ensure there was no misunderstanding? What if he not only had to come up with those words, but stick to the script?
Just imagine if Mr. Trump were Fed Chairman. Now that's uncertainty!
But Mr. Trump doesn't have his eye on being the Fed Chairman, he has his eye on changing the way a presidential campaign is conducted. Time will tell as to whether this works for him, and in turn, where the markets go in 2016 and beyond.
Chad Carlson, CFA, is a owner and wealth manager at Balasa Dinverno Foltz LLC.
