wall street fears a trump presidency. stocks may lose 10 to 12 percent of their value if he wins the november election, and there may be a broader economic downturn. these conclusions arise from close analysis of financial markets during monday<u+2019>s presidential debate, which provides a fascinating case study of the complex interconnections between american politics and economics. the market<u+2019>s judgment stands in sharp opposition to donald j. trump <u+2019>s claims that his presidency would be good for business. decoding these market signals is no easy task because it is difficult to disentangle correlation from causation. ideally we would observe stock prices in parallel universes with identical economic conditions, with a single exception: in one, mr. trump has a good shot at becoming president, while in the other, his chances are low. monday<u+2019>s presidential debate provided a rough approximation of this experiment. at 9 p.m., before the debate began, the betting markets gave mr. trump a 35 percent chance of becoming president. two hours later, after the debate, we had entered the parallel universe in which economic conditions were the same, but mr. trump<u+2019>s chances had fallen a tad below 30 percent . during the debate, the overnight futures markets rallied, raising the value of broad stock market gauges like the standard & poor<u+2019>s 500-stock index by two-thirds to three-quarters of a percentage point. this was a consequential move, and because it was driven by the reduced chance of a trump presidency, it reveals that the market believes that stocks would be worth more if he were to lose the election. four pieces of evidence support this interpretation. first, the rally played out in virtual lock step with mr. trump<u+2019>s debate performance. when mrs. clinton pummeled him over his tax returns, stocks rose. and this pattern of stocks rising in response to mr. trump<u+2019>s miscues continued through the evening. second, the rally occurred between 9 and 11 p.m. on a monday, typically a fairly tranquil time and, in this case, a stretch in which there was no other important economic or financial news. this suggests that the rally was not driven by other factors. lisa brown, principal at gorgon capital research, said, <u+201c>the only thing going on that would move markets in this time frame would be the debate.<u+201d> third, the rise in stock prices was unusually large for that particular time period <u+2014> larger than during the same window on all but one of the 200 previous mondays. it appears to be a statistically significant move, not one caused by mere chance. finally, a particularly large rise in the value of the mexican peso paralleled the rise in s.&p. 500 stock futures. the peso move, which appears to be linked to the reduced likelihood of mr. trump<u+2019>s being able to put into effect his immigration and trade proposals, also suggests that the financial markets<u+2019> reaction was a judgment that mr. trump lost the debate. all told, it appears that mr. trump<u+2019>s apparently declining political fortunes drove stocks higher. this implies that the market expects better times if mrs. clinton becomes president. if mr. trump stages a comeback in the next debates, expect stocks to fall sharply. how much better would the market perform under a president clinton than a president trump? consider the rise in stock futures. at first blush, an increase of less than 1 percent doesn<u+2019>t sound like much. but it points to something much bigger. after all, if a relatively small decline in the likelihood of a trump presidency led to a modest stock rally, then a larger decline in mr. trump<u+2019>s electoral fortunes would most likely lead to a larger market reaction. a surprise win for mr. trump would probably set off a substantial market correction. we can be a bit more precise. according to political prediction markets , the odds of a trump presidency fell by nearly six percentage points during the debate. by contrast, the difference between a certain trump loss and a certain trump win <u+2014> by definition, a 100-percentage-point change in probability <u+2014> is around 16 times as large as that six-percentage-point drop. it follows that the difference in the value of stocks under a president clinton versus a president trump is 16 times as large as monday night<u+2019>s stock market shift. putting the pieces together (multiplying that 16 by the percentage point rise in the s.&p. 500 value), this suggests that the market expects stock prices to be 10 to 12 percent lower if mr. trump wins than they will be if he loses. this is a big difference. what does it all mean? when economists conduct <u+201c>event studies<u+201d> like this, they typically do so in the hope that movements in stock prices reflect the informed bets of traders trying to assess the future profitability of the businesses they<u+2019>re buying or selling. if that<u+2019>s right, then wall street is telling us that if mr. trump is elected, it expects the profitability of america<u+2019>s largest businesses to be about 10 to 12 percent lower on average in the future. this is all the more remarkable because it occurs despite mr. trump<u+2019>s having promised an enormous profit-raising corporate tax cut. either the markets don<u+2019>t believe he<u+2019>ll deliver on these tax cuts, or they believe that the rest of his economic program will do enough harm to more than offset the benefits of lower taxes. unfortunately, an event study is silent as to what<u+2019>s behind wall street<u+2019>s fears. this sort of adverse market reaction might reflect concerns about mr. trump<u+2019>s unconventional approach to the federal reserve , worries about a possible trade war , fiscal irresponsibility , apprehension about national security or simply the cost of greater uncertainty. assessing what this means for the broader economy requires a bit of guesswork. it all depends on the extent to which wall street<u+2019>s worries are also worries for main street. if the trump stock discount reflects expectations of lower earnings and if the rest of the economy performs like publicly traded companies, the math suggests that overall national income would fall substantially, perhaps by as much as 10 to 12 percent over coming decades. if only big publicly traded companies were to suffer, the decline would be less; if the rest of the economy were more vulnerable, there would be a greater decline. some of the market<u+2019>s aversion to mr. trump probably reflects the assessment that the world would simply be riskier under him. traders are so unsure of what the future would hold that they<u+2019>re reluctant to invest in stocks without a huge discount. we can put this in historical perspective. in research with the economists erik snowberg of the university of british columbia and eric zitzewitz of dartmouth college, i<u+2019>ve studied how the stock market responded in the days surrounding each presidential election back to 1880. typically, we found that no candidate moved the market by more than a couple of percentage points. moreover, it was somewhat more common for the stock market to rise slightly on the election of a republican than of a democrat. the 2016 pattern is an exception. the market prefers the democrat and believes that mr. trump is a unique threat to prosperity. it appears to assess the consequences of a trump victory as a bit worse than 9/11, and roughly comparable to the onset of the iraq war . justin wolfers is a professor of economics and public policy at the university of michigan. follow him on twitter at @justinwolfers . the upshot provides news, analysis and graphics about politics, policy and everyday life. follow us on facebook and twitter . sign up for our newsletter. a version of this article appears in print on october 2, 2016, on page bu5 of the new york edition with the headline: who<u+2019>s afraid of trump? 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debate night message: the markets are afraid of donald trump
justin wolfers