Behold the bonfire of the certainties. In combination with June’s Brexit vote, the political reaction that many assumed would hit in 2009 has finally come to pass. The US wants to reverse globalisation, as does the UK, while France, Germany and Italy all have a chance to upen d the status quo at the ballot box in the coming months.
The certainties that had reassured investors and financiers since the era of Thatcher and Reagan, and that are now in question, include a global commitment to free trade, independent central banks, a financialised version of capitalism, and relatively limited social safety nets. Although many of those voting for British exit from the EU, and for a Donald Trump presidency, have a deep distrust of governments, the likely result is more interventionist governments.
Mr Trump’s character adds a layer of uncertainty. As President Barack Obama argued, to no avail, it is worrying when someone who will now have control of the nuclear codes cannot be trusted with their own Twitter account. This uncertainty will itself damage securities prices and shake confidence.
Putting Mr Trump’s personal character to one side, in the broader picture the result should not have been a surprise. Back in 2008, as the financial crisis broke, many thought a political crisis would ensue within months. Capitalism appeared broken, and some form of populist reaction an inevitability. The surprise is that the denouement has been so long delayed.
Blaming central bankers, as many of the people behind the UK and US populist revolts tend to do, misses the point. The loose monetary policies of the past eight years helped deepen inequality by raising the wealth of those already with assets, without breathing sufficient life into those economies. But central bankers were for the most part following these policies to buy time for politicians to take the needed longer-term measures. Such necessary action - whether a big programme of infrastructure investment or a painful structural reform - has not been forthcoming. Central banks have looked increasingly uncomfortable with their new role, while each fresh dose of monetary easing has had less impact than the one before.
A financial regime change beckons, but for the next few days, we can expect to follow the “Brexit playbook”. A big sell-off of US assets, followed by a subsequent bounce, could be taken as given. Emerging markets will be a particular victim due to their dependence on trade. They appeared to be at the beginning of a renaissance; that is now in question. Markets tend to overshoot, and this will produce some buying opportunities and bargains.
Only once Mr Trump is in office will a clear direction be set. The first item on the agenda is the Federal Reserve. The market sell-off should force the Fed not to go through with raising rates next month. A move to curb the Fed’s independence, or an exit by its chair, Janet Yellen, could create alarm.
After that, it is over to Mr Trump. The range of outcomes is huge. An aggressive fiscal expansion - such as slashing corporate tax - would presumably pass the Republican House. That could raise inflation, but might well cheer asset markets. Hopes for such a positive outcome helped limit the initial damage once Wall Street opened on Wednesday, after overnight futures markets had signalled a sweeping sell-off.
Meanwhile, the tariff war he often promised in the campaign would be unalloyedly negative for capital markets - and this is an area where the president has relatively great freedom to act.
So in historical terms, the range of possibilities goes from the early Reagan years (when a great bull market took root) to the disastrous Smoot-Hawley tariffs that followed the 1929 crash. Extreme volatility is certain.
What is undeniable is a deep pessimism and anger within the electorate. A famous work of stock market history is called Triumph of the Optimists; it argues that the second half of the 20th century, with the rebirth of Germany and Japan, the peaceful end of the cold war and widening free trade, were a triumph for those who looked to the future optimistically at mid-century.
Markets peaked at the end of 1999. Since then, anyone who felt that optimism had been taken too far, feared reverses and preferred the gloomy option of bonds to buying equities, has come out on top. The advances from 1950 to 2000 then taken for granted are now in doubt. From an investors’ point of view, the past 16 years have been terrible compared with what seemed possible at the turn of the millennium. As certainties disappear, this election marks the triumph of the market pessimists.
