Add the juggernaut that is Donald J. Trump to the list of what-ifs that is worrying Wall Street.
A growing realization that the unpredictable New York real estate developer is in a position to win the Republican nomination and then battle Hillary Clinton for the White House in November’s election has caused some investors to sell U.S. stocks. They fear having such a wild-card president could trigger trade wars, hurt the economy, and add a lot of market volatility.
“As the market rarely feasts on lack of predictability—Trump represents a nightmare for investors this year,” said hedge fund manager Douglas Kass of Seabreeze Partners Management Inc, who said last week that he was adding to his existing short bet on the U.S. stock market in part because of Trump’s increasingly strong position in the race.
Trump’s statements on business and Wall Street don’t neatly fit into one ideological worldview, but if anything, they are seen as isolationist in a globally connected world. He can also suddenly pick on businesses over various issues, such as his call for a boycott of Apple Inc’s (aapl) products after the tech giant refused to help the FBI unlock the iPhone used by one of the San Bernardino shooters.
“The election this year is the height of uncertainty,” said Phil Orlando, a senior portfolio manager and chief equity strategist at Federated Investors in New York, which manages $351 billion. He said political concerns – personified by Trump’s emergence as a frontrunner – are one of the main reasons why he began reducing equity exposure in mid-January.
There are, of course, plenty of other factors having an impact on U.S. financial markets. U.S. stocks rallied on Tuesday after strong U.S. factory and construction data suggested the economy was regaining momentum. That was even as investors contemplated expectations that Trump would do very well in 11 states holding Republican primary or caucus elections on this Super Tuesday.
Trump’s rhetoric mixes populist criticism of immigration policy, Wall Street behavior, and other countries’ trade policies, while also citing support for business-friendly efforts such as lower taxation. The lack of detail from Trump about his policies and how he would implement them is a particular worry for investors.
“Trump has been light on policy substance so it’s very difficult for the markets to handicap,” said Dave Lafferty, chief market strategist at Natixis Global Asset Management, which manages $870.3 billion in assets. He expects market volatility to rise if Trump extends his lead in Tuesday’s elections.
Some investors are particularly concerned about Trump’s nationalist rhetoric, saying it is potentially destructive to a global economy that is already struggling. If it reduces trade flows then it could also hamper U.S. and global growth and hurt U.S. company profits.
The real estate investor proposes labeling China a currency manipulator and ending what he calls China’s illegal export subsidies and theft of U.S. intellectual property. He also wants to penalize companies who move jobs from the U.S. to Mexico by hitting them with high tariffs if they want to export back to the U.S., as well as build a wall at the Mexican border to prevent the flow of illegal immigrants.
“In areas of trade policy and foreign affairs lies the greatest uncertainty,” Kass said. “Trump is not likely to be market-friendly in any of these policy areas.”
In response, Trump’s spokeswoman Hope Hicks said in an email to Reuters that the same crowd criticizing the Republican Party’s top candidate had been responsible for causing the last worldwide recession and economic meltdown in 2007-2008.
“They have zero credibility,” said Hicks. “Mr. Trump will restore confidence to the global markets by ending runaway spending and borrowing, restoring trade balance and fairness, and bringing wealth to America’s middle class.”
Investors had, for some time, been concerned about the strength of Vermont Senator Bernie Sanders’ insurgent campaign for the Democratic nomination against former Secretary of State Clinton, given he declares himself to be a democratic socialist and has said Wall Street’s business model is fraudulent. With recent losses to Clinton in Democratic contests in South Carolina and Nevada, he is now seen as less likely to win the nomination.
Trump’s plans include ideas that traditionally come from Republican candidates, such as lowering the corporate tax rate, simplifying the tax code, and as his web site puts it, cutting the deficit through “eliminating waste, fraud and abuse” and “growing the economy to increase tax revenues.”
“I think markets will like Trump on the taxes issue since he favors lower rates and a permanent change in repatriation rules,” said David Kotok, chairman and chief investment officer at Cumberland Advisors in Sarasota, Florida, which manages $2 billion in assets.
Still, financial advisers say that Trump’s plans to do away with the so-called carried interest tax loophole – which gives hedge fund and private equity managers preferential tax treatment on much of their income – would prompt more selling if he begins to climb in national polls against Clinton.
Jeffrey Gundlach, the co-founder and CEO of bond investing and trading powerhouse DoubleLine Capital, said that Trump has a history of being ”comfortable with a lot of debt and leverage,” and that won’t impede him from spending heavily. He said he believes Trump’s pledge to spend heavily on the military makes defense stocks a good investment play.
Others see such spendthrift tendencies more darkly.
David Ader, chief government bond strategist at CRT Capital Group in Stamford, Connecticut, said Trump’s history raises questions about his ability to run an organization as unwieldy and complex as the government. The businessman has in the past filed for Chapter 11 bankruptcy protection for the Trump Taj Mahal casino and Trump Plaza Hotel.
Ader says the uncertainty would cause investors to flock to safe-haven U.S. Treasuries should Trump take office.
“It’s one thing to run casinos that have gone bankrupt, it’s another to run a country and its foreign policy,” he said.
Whether he would enjoy the support of the Senate and House of Representatives is a critical question, and will determine how many of his policy pronouncements can be turned into legislation. Congress could act as a brake if Trump gets the presidency and behaves as wildly as Trump the candidate. He clearly does not have the full support of a number of key Republican senators and would be unlikely to get much Democratic support for many measures.
Todd Morgan, senior managing partner at wealth management firm Bel Air Investments Advisors in Los Angeles, said that the increasing likelihood that Trump will be the Republican nominee is one reason why he has raised cash in some client portfolios over the past four months. He would likely sell more if it looks like Trump will win the general election, he said.
“It’s like a scale and you keep dropping more weights on the balance everyday, and the political uncertainty is becoming a bigger and bigger weight,” he said.