Why They Stayed Calm and Carried On
By SCOTT SUMNER who is Ralph G. Hawtrey Chair of Monetary Policy at the Mercatus Center at George Mason University and Professor of Economics at Bentley University. Follow him at the TheMoneyIllusion.com.
This article was published in Foreign Affairs on November 13, 2016.
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World financial markets have had an unusual reaction to the unexpected U.S. presidential election victory of Donald Trump: they remained relatively calm and, some might say, even responded positively. Unlike the British pound after the Brexit vote, which tumbled rapidly shortly after, the U.S. dollar, after Trump’s election, actually strengthened modestly against foreign currencies such as the yen, the euro, and the yuan. Interest rates in the U.S. treasury bond market have increased, in both nominal and real terms. Inflation is also expected to increase modestly.
The reaction of global equity markets was perhaps the most surprising of all. U.S. stock futures fell as much as five percent on Tuesday evening, as it became apparent that Trump had all but secured a victory. The behavior was consistent with the pre-election pattern. Whenever polls showed an increased chance of a Trump win, stocks tended to dip (as they did following reports that FBI Director James Comey would be reopening an investigation into Secretary Hillary Clinton’s emails). But a few hours after Tuesday’s decline, stocks beat expectations and crept back up. By the end of the next trading day, the market was above pre-election levels.