The U.S. election is almost certain to be the sole fixation of the financial world this week. Everything else is secondary to Tuesday's vote – the culmination of a bitter marathon of an election campaign.
The final days of the campaign have seen financial markets suddenly gripped by the potential for an outcome that was thought to be a distant fantasy: that Donald Trump will be the next U.S. president.
As the adage goes, the market hates uncertainty. It also doesn't seem to like Mr. Trump very much.
As his chances of victory have improved, investors have responded with a sell-off in equities rare in its consistency and duration. The S&P 500 index posted a ninth consecutive daily decline on Friday, its longest losing streak since 1980. Only 13 times in history, dating back to 1928, has the market seen a losing streak that long, according to S&P/Dow Jones Indices.
Canadian stocks have fared little better, having declined in eight of the past 10 trading days. While that slide is partly attributable to renewed pressure on crude oil prices, fading investor sentiment is likely to blame for most of the equity weakness, said Paul Taylor, who helps manage about $85-billion at BMO Global Asset Management.
To be clear, a Hillary Clinton victory is still very much the probable outcome.
As of Sunday morning, the data analysis website FiveThirtyEight.com said there is a 64-per-cent chance she will win. If she does, both U.S. and Canadian equities are likely to see some modest relief rally, Mr. Taylor said.
But as an institutional investor, he is positioning his portfolio to protect it from an upset Trump win on Tuesday, and the potential downside that could come with that outcome.
"There are areas of the market that will definitely be negatively affected by a Trump victory," he said. Canadian sectors and companies most heavily exposed to trade with the United States come to mind, he said. The Canadian dollar might also fall.
The short-term downside would likely start to materialize on the Wednesday morning after a Clinton defeat. A "risk off" reaction would see most stock indexes decline as investors migrated to safety.
Citigroup's chief U.S. equity strategist Tobias Levkovich said the S&P 500 would likely sell off 3 to 5 per cent on a Trump victory. "That outcome would have been unexpected and thereby may cause a jump in the equity risk premium," he said in a note.
Other strategists have warned of a far more severe reaction – on the order of the broad crash in equities that accompanied the global financial crisis.
That view is probably too extreme. "Labelling a Trump victory as a 'black swan' event, let alone prognostications for a 5-to-10-per-cent sell-off the day after the election, if Trump wins, are callous and wreak of fear mongering," BMO Nesbitt Burns chief investment strategist Brian Belski said in a report.
The Canadian dollar would probably see some downward pressure if Mr. Trump wins, Mr. Taylor said. In an environment where the market is shedding risk, the U.S. dollar is a typical beneficiary. "Even though the issues might emanate from the U.S., its dollar might still be where people go to hide."
Despite the immediate shock that might result from a surprise on Tuesday, the U.S. economy is looking healthier of late, with support coming from strong data on spending, manufacturing and wages, Mr. Belski said. Friday's labour market report said the U.S. unemployment rate is 4.9 per cent and wages are growing at the fastest rate since the recession. That's a far different picture than the one Barack Obama inherited when he won the 2008 presidential election, in the midst of the financial crisis.
So, why is the market so negative on Mr. Trump? Part of the challenge in assessing the likely economic outlook of a Trump presidency is the lack of clarity on his policies.
In general terms, his economic platform emphasized personal and corporate tax cuts, infrastructure spending and limits on regulation. But his stance on trade – of utmost concern to Canadians – is seen by most economists as a step backward.
"If we really went down the road of reopening NAFTA and putting up trade barriers, there's no doubt that would be negative for Canada," said Matthew Barasch, RBC's head of Canadian equity strategy.
But it's doubtful many Republicans share Mr. Trump's hostility to the trade agreement.
"You'd have to unwind the North American supply chain. You could do it, but it would be very difficult and very painful for U.S. manufacturing. And you probably wouldn't have the support of Congress," Mr. Barasch said.
Even so, a Trump win could only be considered a negative for Canada's trade-heavy sectors, such as industrials. Those stocks would likely benefit should Ms. Clinton prevail.
There's a third scenario on Tuesday that would likely strike the greatest blow to investor sentiment – if the outcome of the vote is disputed.
"In the 'hanging chads' era of the 2000 presidential election, the S&P 500 dipped more than 11 per cent from Election Day into December when the Supreme Court ruling finally settled the issue," Mr. Levkovich said.