How Would a Donald Trump Presidency Affect Your 401(k)?

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Ronald Reagan, then the Republican front-runner, on the floor of the New York Stock Exchange in March 1980. As president, he placed tariffs on some electronics imports from Japan.© Associated Press
Ronald Reagan, then the Republican front-runner, on the floor of the New York Stock Exchange in March 1980. As president, he placed tariffs on some electronics imports from Japan.

Would President Donald J. Trump be good or bad for your stocks?

Quotes in the article

The stock market is a nervous animal that can easily find a reason to sell off sharply, but so far it has taken the rise of Mr. Trump in stride.

The Standard & Poor’s 500 index has climbed 6 percent since Super Tuesday, on March 1, when Mr. Trump’s victories showed him to be the front-runner for the Republican nomination. And it has kept rising as Mr. Trump has built momentum and as Mrs. Clinton has suffered setbacks, like the release on Wednesday of a report by the State Department’s inspector general that was critical of her use of a private email server. The benchmark index on Wednesday closed at a mere 2 percent below its record high.

The relatively high valuation of the stock market — it’s trading at 20 times historical earnings — indicates that investors don’t see any big threats from his stated policies.

“How much do you think he will get enacted?” said Jim Paulsen, chief investment strategist at Wells Capital Management, who isn’t showing signs of worry. “Politicians are great at telling you they are very important.”

But it’s not hard to conjure up ugly events in a Trump presidency. His trade policies could damage the economy and lead to job losses, and his fiscal policies could create a far larger deficit, adding trillions to the national debt. Stocks and mutual funds held by households have increased in value by over $8 trillion, or 60 percent, over the past five years. If the stock market did make a big move down before the election, it would be felt on Main Street and your street.

So why is Wall Street not more worried? And should ordinary investors be worried that Wall Street is not worried?

It may be a little too early to tell if the stock market is being cavalier about Mr. Trump. Investors don’t make big decisions on the basis of a few close polls more than five months before the presidential election. But polls that occurred nearer to Election Day, and that showed Mr. Trump well ahead, would more clearly test what investors think of his becoming president. (If you want to know when to worry about the polls, this Upshot article has some good pointers.)

Another big reason that Wall Street appears unfazed may be that investors still expect Hillary Clinton to win. Her policies would not be a big departure from those of President Obama. A clear sign of Mrs. Clinton’s support on Wall Street is the large amounts of money that she has been raising from financial executives.

While center-left policies may not please some on Wall Street, the economy has recovered under President Obama. And, if anything, the economy could get stronger, not weaker. House prices are strongly rising, consumers are borrowing without becoming over-indebted, and the banking sector looks safer than it has been in many years.

Then there is a belief on Wall Street that a President Trump would end up being no more than a rougher-edged version of Mitt Romney when it comes to policy. In other words, Mr. Trump would dial down his combative policies — like blocking imports from China and Mexico — once those views got him the votes needed to win the presidency. The other way this theory works: Congress and the courts prevent him from pursuing goals that could create instability, like the mass deportation of illegal immigrants.

A related school of thought says that limited trade battles would not do much damage to the economy — and might even help it in the long run. David Rosenberg, the chief economist and strategist at Gluskin Sheff, notes that Ronald Reagan placed tariffs on some electronics imports from Japan, the China of that era. “If the markets were to sell off because of his election success, I’d tell clients to find another reason to be bearish,” Mr. Rosenberg said.

Even if Mr. Trump ended up compromising on many of his antagonistic positions, the residual tension could cause harm. The global economy has been vulnerable to political and economic shocks emanating out of one region (Europe) or country (China). The stock market dropped more than 10 percent last year after China devalued its currency by a small amount, for instance.

Wall Street’s apparently laid-back reaction to Mr. Trump’s rise is a twist on the notion that gridlock is good for stocks. Much money has been made over the years betting that politicians don’t need to be feared because they can’t do much — or won’t. But Mr. Trump could test this consensus view. He didn’t adopt confrontational trade policies all of a sudden; he has pushed them for many years. And he has shown little appetite for compromise or bridge-building in his campaign, so why expect it if he were in the White House?

It’s too soon for the election to move the stock market by much. But if Mr. Trump were ahead in the fall, it wouldn’t be shocking if the herd suddenly turned.

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How Would a Donald Trump Presidency Affect Your 401(k)?