Pick one of the essay questions included.

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How the financial markets reacted to the election of Donald Trump, and are the

financial markets positioning themselves against uncertainty over the president-

elect of the US?

This essay will critically investigate the pre and post periods of Donald Trump's

election victory in the US by looking at how the financial markets and investors

priced and reacted to the uncertainty caused by his controversial statements

and outbursts during the election campaign. The essay is divided into two

sections, including an analysis, from both the political and economic

perspectives, to deeply understand why Trump sent shock waves to some

segments of society while seen as an opportunity for the future by others. The

first section will dive into the political sphere by briefly touching upon some of

Trump's pledges. In the meanwhile, this essay will pick up multiple case studies

from previous historical volatile periods. Thus, these developments will shed

light on the question of whether financial tools, such as stocks, shares,

derivatives, and currencies, reflect positively or negatively on the remarkable

political or historic moments, such as election races that were tremendously

shaping the country's as well as the world's futures. From the general to the

specific, the case studies will only be taking the recent US election and the

history of previously elected candidates who managed the US into account.

Historical data from financial markets will be used explicitly for that election

period. One example includes economic data that dropped into markets

according to the estimated and near-official election results. For instance, the

data appeared after Obama's trail to the Oval Office was simultaneously

compared to the data dropped into markets after Trump's election. This

comparison will be made to measure how investors position themselves under

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uncertain but temporary situations to minimise the momentary risks involved.

This essay will also incorporate various references from academic papers and

opinion leaders who wrote extensive analyses, regardless of the election's

outcome, for newspapers to inform the public.

At the onset, it is vital to define the terms "uncertainty" and "risk" to provide

some basic knowledge and make a clear distinction between risk and

uncertainty in their fields. Such distinctions will help us to understand which

term broadly captures the financial markets when it comes to examining

volatility in financial markets. In a dictionary definition, the Business Dictionary

describes risk as a "probability or threat of damage, injury, liability, loss, or any

other negative occurrence that is caused by external or internal vulnerabilities,

and that may be avoided through pre-emptive action." This meaning becomes

clearer when we define uncertainty. In this context, the person knows the

possible outcomes in advance. This scenario is described best by the widely-

accepted rolling dice situation. The player knows what the odds are for each

occasion before rolling the dice. In contrast, genuine uncertainty occurs when

the possible outcomes cannot be known beforehand. Therefore, in the world of

financial complexity, it is the genuine uncertainty that best fits our measures.

The tough decisions often must be made in the complex system of the economy

where lots of actors and financial tools interact over time. For instance, although

every pollster indicated Hillary Clinton's victory, Donald Trump's success can be

used as an example of risky positioning of investors caused by the miscalculation

of the surveyors. It can be said that the centre media extensively supported

Clinton, even at the expense of misleading the investors' perceptions. If the

investors failed to evaluate every scenario before making an investment, it also

meant that some of the investors lacked the required competence, and they

heavily relied on the investment ideas coming from so-called experts who did

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not have the proper knowledge to guide investors. A research survey in August

2008 of investment managers documents a widespread lack of understanding

about derivatives products and risk management issues. Moreover, the study

also reveals that 40 percent of fund managers bought investment products that

had no structure to evaluate risk (Pengelly, 2008). The pricing uncertainty must

depend on more reliable sources rather than just tied with temporary events.

In my view, because of the dynamics of the financial sector, there is always one

degree of uncertainty during the decision-making process of investors.

However, this essay advocates the idea that in the long term, the tools of finance

(stocks, derivatives, shares) minimize the risks and are less likely affected by

rapid changes with the extended options available for investors. Because the

rational investor knows that there are no more than two variables for election

2016; therefore, at least, they had to have some idea and roadmap that

captured all possibilities. Fragniere and Sullivan 2007, p.21, offer this depiction

of the objective nature of standard finance academic models in which "financial

risks can be alleviated and addressed using databases and computer programs

tailored to the nature of your business." These options often include

diversification strategies, which spread the portfolio into different stocks or

alternatives and hedge the investments, which refer to coverage of the

investment and protecting it from unexpected shocks over the period. Thus, this

volatility does not necessarily occur because of the political atmosphere facing

the country; it could also happen due to the variety of backgrounds and

expectations that people have regarding their investments in the market. At the

same time, due to technological advancements, people's ability to access

required information via the internet is such that they are only one click away

from making a discovery. Some scholars have argued that once the new financial

tools came into effect in 2008, the popular perception of investments radically

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changed in parallel with the availability of financial tools that made investing

least comfortable for them. Meanwhile, this abundant choice of investments

adds extra complexity for examining and minimising the uncertainty. In essence,

Leong et al. (2002, p. 9) contend that the financial "environment is simply too

complex for the classical theories to describe adequately. In a world that is

changing faster than we can understand, the risk seems more difficult to

understand and control." Embedding the technology into the financial system

inevitably leads to time saving for the investors in a way that decreases the

required time for making efficient and healthy decisions. This essay will address

the reasoning of investors, especially those who were caught off guard by the

results that defied the so-called experts, pollsters, and industry professionals

concerning the reality of Republican President-elect Donald Trump. It can be

easily said that by electing a Donald Trump, US voters showed a strong desire

for changing an established order. The working class that was ruled in a country

went to the polls and rejected the rising inequality and increased challenges that

it faced over the control of liberal elites.

There is no doubt that the US election in 2016 could be remembered as a

milestone political event that featured the most challenging and aggressive

presidential race in American history. Donald Trump's extraordinary personality

and extremist approach to politics made him an exceptional figure in the world.

Although he found an attractive place in almost every businessperson's list, he

has relatively less experience in politics than his Democrat opponent, Hillary

Clinton. The initial shock of investors should be understood as an attempt to

minimise possible losses and provide themselves with a sufficient time span to

follow the policies of President-Elect Trump and his allies as his presidency

approaches. Furthermore, it is important to note that on the 9th of December,

2016, the US not only changed its president but also changed its political

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ideology following Obama's leadership as a two-term Democrat. The Democrats'

nominee Clinton who was backed by a substantial amount of donation money

from wealthy people and was seen by far as a favourite in the public opinion

polls. Nonetheless, Donald Trump's unforeseeable victory left all Democrat

supporters devastated and pulverised the plans of Wall Street experts' who

betted on a Clinton-win scenario. Thus, he won with the help of a combination

of his unique personality and unusual approach to the current political affairs

such as planning to re-structure a trade agreement that existed in the world

economy for decades.

From an economic perspective, the reaction against Trump is likely to be at least

twice as strong than the reaction of the world for previously president-elected

nominees. Most newspapers called Trump the closest thing to the Black Swan

event it had ever seen in history due to his commitment to no allegiance to the

norms set by the bureaucratic elites. In the aftermath of the 2008 financial crisis,

the term "Black Swan" was popularized by Nassim Nicholas Taleb to describe the

occurrence and influence of highly improbable events. Moreover, the Black

Swan moments happened twice in politics in 2016, beginning with Brexit, which

increased the fear of nationalism movements and spread it effects into the

global world markets that already felt distressed with the Chinese economic

cool-down. According to (Cole, 2014), "True knowledge is not what you know

but certainty in what you do not. Volatility is simply about putting a price on

that." In other words, investors react to the US under the leadership of Trump

collectively due to the herd mentality that dominates human behaviour. Thus,

on Election Day, the nervousness and uncertainty could be seen very clearly.

Almost every stock market in the world responded in a manner parallel with the

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expectations by declining significantly. The S&P 500 and Dow Jones were both

down by 2.5% the day after the election (Berger, 2016). Meanwhile, the FTSE

100 plummeted by as much as 118 points, and it seems reasonable to expect

further declines in the short term in the financial markets. Judging when the

volatile times occur and how long they will last will be hard from now until

January 20, which is the date that Trump takes office. In contrast, the volatility

is strongly tied to the policies that he pledged during the campaign. Whether or

not he will backtrack on some of his promises that caused some raised eyebrows

initially across the world remains unclear. Most often, investors try to price risks

appearing today by looking at the present value of the assets and comparing

that with the overall performance over past decades so as to conduct a valuation

for further possibilities. According to economist John Maynard Keynes, it is not

a risk that prevents people from investing; it is uncertainty that stops people

from investing (Cassidy, 2011). Thus, these sudden changes in the financial

markets do not reflect the actual value of the assets. For instance, according to

a CNN Money contributor (La Monica, 2016), the market only rallied on 6 of the

past 21 post-election days. What this basically means is that markets do not

respond abnormally to temporary events and correct themselves much more

quickly than expected, usually within 2-3 days. CNN Money also argued that the

average decline in the S&P 500 the day after Election Day between 1932 and

2012 was 1.1%. This year, the S&P 500 rose 1.1%. Despite the 6 market rallies in

2008, which was a tumultuous year, there was a sharp decrease in the index of

5.4%. Even in more normal times, when Obama beat Mitt Romney in 2012, the

S&P 500 fell 2.4%. In other words, from an economic perspective, Trump's

victory was digested far better than that of other candidates.

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It is also vital to note that the US stock market is not the US economy. The world

equity markets are comprehensively integrated and embedded with each other

nowadays. Therefore, markets are more vulnerable and responsive to political

changes in the world. Thus, it would not be accurate to say that stock markets

do not respond significantly to these changes and they are unaffected by the

political environment. The future valuation of the stock markets is always

determined by the candidates' approach to the affairs and the economic

conditions of the country. However, once the initial shock is over, financial

markets become stable and much more critical and analysis-driven. This short-

term volatility does not adequately reflect reality. In the long run, regardless of

the political background of the president, over 10-year periods, the earnings of

investors consistently increased. The data in Table 1 shows that from 1926 to

2016, a dollar invested in the S&P 500 in any of the 9 decades and 15

presidencies (from Coolidge to Obama) would have produced a strong return.

Although historical data cannot be used to predict the future performance of

stocks, it is quite clear that temporary shocks such as elections and referendum

periods do not have a massive impact on long-term returns on investment. The

individuals who see the stock market as a speculative place to make high returns

in a short period are severely affected by these temporary shocks.

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In conclusion, trying to outguess the market is often a losing game. This is

because, in the short term, the stock market does not reflect the actual value of

investment tools. The aggregate expectation and knowledge of the investors

often drive the short-term valuation of the financial instruments. As a result, it

can be easily said that Donald Trump's election signals radical changes in some

fields of the American economy and in the world. On the other hand, it is still

too early to decide about the investment under Trump's presidency. As the

master of investment, Warren Buffet, in one of his favourite quotations, stated,

"Ignore the politics and macroeconomics when picking stocks." From his

perspective, investors should seek the best opportunity for which they are fully

confident in the company's long-term potential despite all fears in the short run.

Every investor should bear in the mind that political extremism and other

temporary issues go in an opposite direction of the stock market. There is no

doubt that the election of the Donald Trump will have significant opportunities

for some as well as disappointment for others. At the end of the day, everyone

has to shape his or her future under a very challenging atmosphere.

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Appendix

Table 1

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Reference List

Berger, R., 2016. How Donald Trump's Presidency Will Affect The Stock Market. Forbes [online] 10

November 2016. Available at: http://www.forbes.com/sites/robertberger/2016/11/10/how-donald-

trumps-presidency-will-affect-the-stock-market/#2a7a008b58f1 (Accessed on 15 December 2016).

Cassidy, J., 2011. The Demand Doctor. The New Yorker, 10 October 2011.

[Online] Available at: http://www.newyorker.com/magazine/2011/10/10/the-

demand-doctor (Accessed on 15 December 2016).

Fragni`ere, Emmanuel, and George Sullivan. 2007. Risk management: Safe

guarding company assets. Boston: Thomson Learning.

La Monica, P. (2016) The 'yuge' Donald Trump market rally continues, CNNMoney. Available at:

http://money.cnn.com/2016/11/10/investing/markets-stocks-donald-trump-rally/index.html

(Accessed: 16 December 2016).

Leong, Clint T. C., Michael J. Seiler, and Mark Lane. 2002. Explaining apparent stock market anomalies:

Irrational exuberance or archetypal human psychology. Journal of Wealth Management 4:4, 8–23.

Pengelly, Mark. 2008. Survey reveals funds’ lack of derivative expertise. Risk

21:8, 17.