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Sonders: A surprise Trump win would be unsettling to markets

“A surprise Trump win would be quite unsettling for the markets,” Liz Ann Sonders, chief investment strategist at Charles Schwab, tells Yahoo Finance.

Sonders compares an election upset by Republican presidential nominee Donald Trump to the outcome of the Brexit vote in June. In the hours before Britain’s historic vote to either leave or remain in the European Union (EU), polls pointed to a “remain” victory. The next day, the decision to exit the EU took many, including the global financial markets, by surprise.

“I think a Brexit-type situation where the polls remain where they are and expectations are built in that Clinton’s going to win, and then we wake up the next morning and Trump is the president, that would be very unsettling for the markets,” Sonders said.

The latest polls show Trump trailing Democratic presidential candidate Hillary Clinton by an average of 7 points and far behind in the Electoral College count.

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Sonders believes the least unsettling outcome for the markets would be the status-quo: a Clinton win in which both houses of Congress remain Republican. “In the case of a Clinton win, it’s at least as important what happens in Congress, too,” she says.

Sonders predicts if Clinton becomes the 45th president and the Democrats sweep both the House and the Senate, the markets will likely have an adverse reaction, “because then I think some of the more economically damaging components of Clinton’s policies could be enacted.”

Sonders adds that a scenario in which Clinton is president but Congress is split would be a positive for stocks. The theory is that the division of power leads to gridlock in Washington, allowing the markets to flourish freely.

But the numbers suggest that it’s a myth to think markets do better under a divided government. InvesTech Research looked at stock returns going back to 1928 and found that in the two years following an election, the S&P 500 index gained 15.6%, on average, when one party controlled both houses of Congress and the other party owned the White House.

The index rose 16.9% on average when one party controlled the White House and both houses of Congress. When the House and Senate were divided, the index rose an average of 5.5%.

But a divided Congress doesn’t always guarantee more modest returns. In the two years following the 2010 elections, the S&P 500 rallied 19%, and in the two years following the 2012 elections, the index climbed a whopping 42%.