What If Hillary Had Won?

Via ConvergEx's Nicholas Colas,

Counterfactual analysis is a useful way to consider the world we actually inhabit.  To that end, today we ask “What if Hillary Clinton had won the Presidency on November 8th?”


Where would financial markets be trading today, and how does that differ from the reality we see on the screen?  The S&P 500 is up 6.6% since Election Day (11/8/16).  Our best guess is that US stocks would have rallied 2% after a Clinton win as the uncertainty of the election lifted, so the differential of 4-5% is the actual “Trump rally”. The real differences come when you look at interest rates.  The 10 year yield on Election Day was 1.86%.  Now, it is 2.47%.  Had Secretary Clinton won, it might not have even risen to 2.0% given that it was rarely over that level in pre-election 2016.  


The key lesson from this exercise in “What if...”: US stocks don’t seem to fully reflect the power of the “Reflation trade” priced into Treasuries. The push-pull of that dynamic (better earnings vs. higher rates) should drive volatility higher in the weeks to come.

What if the South had won the US Civil War?  That is the subject of an essay by Sir Winston Churchill, published in 1931 as part of a collection titled “If It Had Happened Otherwise”.  By his estimation, the British Empire would have ended up acting as a go-between for a fractured “Un-United States” and eventually all three would have merged into an “English Speaking Association”.  The power of that alliance would have prevented World War I by driving a wedge between the combatants of continental Europe and the world today would be very, very different. For Churchill fans, here is a good description of how he got the idea while on a trip to the US in 1929.

Counterfactual history – imagining alternative outcomes to important events – is part analysis and part fantasy.  At its best, it can illuminate how watershed moments shift the sands in the hourglass.  Some events are clear demarcation lines in world history, and the talented historian (Churchill being first among equals in that camp) can do much with this contrivance to illuminate just why they mattered in the first place.

Today we will use counterfactual history in its smallest form and simply ask “Where would capital market prices be today if Secretary Hillary Clinton had won the 2016 US President election?”  One of our senior options traders asked me that question this morning, and I thought it was a neat way to parse out just how much (and where) the “Trump rally” has changed investor perceptions.  It has been 78 days Americans went to the polls, and since then financial asset prices have changed in the following ways:

  • The Dow Jones Industrial Average is up 8.6%, from 18,333 (close on 11/8/17) to now.
  • The S&P 500 is 6.6% higher, closing at 2140 on Election Day.
  • The 10 Year Treasury yield has moved from 1.86% to 2.47%, and the price return on +20 year US sovereign debt is negative 9.8% since the US election.
  • The CBOE VIX Index is substantially lower, closing today at 11.1 after ending the day on November 8th at 18.7.
  • The best performing S&P Large Cap sector YTD is Materials, up 5.7%. The best performing sector over the last 3 months (the round number that comfortably brackets pre- and post-election action) are the Financials, up 18.2%.  Materials and Industrials are roughly tied for second, up 11.3/11.6%.
  • US mid caps and small caps have comfortably outperformed domestic large caps, with 3 month returns of 10.5% and 13.1% respectively versus 5.6%.
  • Correlations between asset classes and sectors have declined dramatically and remained lower this month.
  • The US dollar has strengthened modestly against the euro since Election Day ($1.10 to $1.07), remained constant against the British pound ($1.25) and strengthened notably against the Japanese yen (103 to 114).
  • Earnings expectations from Wall Street analysts have not fundamentally shifted since the Election, with bottom-up estimates for the S&P 500 at $133/share.

So how would things be different if Secretary Clinton had won?  A few thoughts:

The S&P 500 would likely have rallied, but not as much as it has. The logic here is simple: the election was sufficiently contentious that US equities were likely to bounce higher once a winner was announced and the loser conceded.  That closing VIX on Election Day at 18, high for post-Financial Crisis US equity markets, tells you that.


Moreover, a Clinton win would have preserved the gridlock-prone status quo that had existed in Washington for the last 6 years, during which time US equities generally did quite well.  Average S&P 500 returns during that time were 12.8%.


Our best guess is that US stocks might be 2 percent higher if Hillary Clinton had prevailed on Election Day.  No real science there – just a quick poll among some of the senior people on our desk.  There wasn’t much of a range in their responses; everyone said 2 percent.


Everyone I asked also agreed that long term yields would be lower. The US 10 Year Treasury yield rarely broke 2% during 2016 until the Election was over, and since Secretary Clinton was the odds-on favorite for the entire campaign season it is reasonable to think it would not have done so after her win.


The fact that yields now trade between 2.3-2.5% is therefore purely a function of expectations for higher inflation and/or greater debt issuance due to President Trump’s proposed policies of lower taxes and increased infrastructure spending.  Loosely known as the Trump “Reflation trade”, this is one area where a Clinton victory would have generated a very different outcome.  Even if you believe a Democratic victory would have sparked a relief rally equivalent to the one we actually got, I doubt you would have pegged the 10 year to yield 2.5% in January 2017.


Sector correlations and performance would likely have been quite different as well. Materials and Industrials wouldn’t be leadership groups; most likely Technology (which has underperformed over the last 3 months by 100 basis points) would have been the workhorse sector as it has been for much of the last 6 years.  And forget Financials…  Those would have been held back by a flatter yield curve.


As we have noted in prior briefings, correlations have fallen since Election Day as well.  Average sector correlations now run 50-60%, versus the 70-90% of the last 6 years.  Chalk that up to the direct and indirect effects of a Trump win, with markets discounting a new set of winners in a Trump administration versus a more status quo environment under a President Hillary Clinton.

The upshot to this mini-counterfactual is the dichotomy between equity and bond market performance. 

Fixed income markets are essentially in a new world; US stocks, by comparison, are in only a slightly better position. 


The “Trump rally” has only been worth 4-5% when compared to our “What if” Clinton scenario. 


Realistically, it should either be more (if bond markets are right about a breakout in inflation/corporate pricing power) or less (with higher rates pressuring equity valuations in the absence of greater earnings power).

And so we come to the conclusion that equity markets will show more volatility in the weeks to come since this philosophical tug of war has only just begun.