Despite an early panic on election night, financial markets quickly bounced back into shape on Wednesday morning after Donald Trump was elected president of the United States.
Trump’s victory sent global financial markets into disarray as the Dow Jones Industrial Average plummetted by 800 points overnight.
“The market overreacted,” said Jack Carr, economics professor at University of Toronto. “The problem is that markets don’t like uncertainty, and it’s unclear whether [Trump’s] really going to implement the policies that he talked about, in particular ripping up free trade agreements — so that spooked the market.”
The financial markets were ready for a Hillary Clinton win, and when that didn’t pan out, there was anxiety and skepticism of Trump’s policies on trade and immigration.
“Markets reflected a negative knee-jerk response to a president-elect who is very much the unknown when it comes to governing,” says TD Bank economists Beata Caranci and Leslie Preston. “Trump has never held elected office or a high ranking public position, and campaigned on a number of hot-button issues.”
This reaction was mirrored in the global market as the Mexican peso fell 13 per cent to hit a record low of 20.77 against the U.S. dollar. Stocks were down over 4 per cent in Europe and the UK and over 5 per cent in Japan.
However, investors quickly identified the positives as the markets rebounded and some more the following day, with the Dow closing up over 256 points at 18,589 and the TSX closing up 103 points at 14,759.
“When they had a sober second look, they saw that it’s not going to be that bad and in fact there are a number of things that are good for the economy,” Carr said.
“He wants to lower corporate tax, reinstitute the Keystone pipeline, and he’s not a believer in climate change, which means policies such as carbon taxes, which will be costly to be the economy, aren’t going to happen. All of these are good for the US market and would thus good for Toronto too.”
Carr says the Trump presidency can in fact have a positive long-term effect on Toronto’s financial markets as long as he doesn’t damage NAFTA.
“If he actually gives notice that those agreements are going to be terminated, that would do damage to the North American economy and the markets will go crazy,” Carr said. “We have to wait and see, but I don’t think he’s going to do that.”
Carr says that the direction of Toronto’s market from here on out depends largely on the statements that Trump makes. If he continues to stay away from outlandish statements as he has been for the last few weeks, then investors can remain optimistic.
“They should keep an open mind and watch what the actual policies are rather than go along with wild rumours of what can happen,” he said.