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Why markets are panicked about the possibility of a Trump presidency

World financial markets fell steeply as Republican presidential candidate Donald Trump's lead widened on election night. (Video: Jenny Starrs/The Washington Post)

Investors unloaded their assets Tuesday night as returns from the presidential election showed that Donald Trump had a real chance of victory. Markets in Asia tumbled, as did the value of the Mexican peso. Futures markets showed sharp declines in U.S. corporate stocks.

The possibility of a Trump victory makes investors anxious for a couple of reasons. For one, investors are unsure of what, exactly, Trump would do if elected. He wavered between various economic policies on the campaign trail. And to what degree Congress would cooperate with Trump in enacting his agenda remains a question.

This uncertainty is forcing down prices, with investors seeking to limit their exposure to risk and selling off less-reliable equities. Mark Zandi, chief economist at the private research firm Moody's Analytics, recently told The Washington Post that investors would flee to safer bets if Trump looked set to win.

“Clinton does represent the status quo. Trump represents change, and it’s unclear what the change is,” said Zandi, who supported Clinton. “That just makes investors very nervous.”

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Economists’ divergent views about the potential effects of Trump’s more consistently expressed policies adds to the uncertainty. Most contend Trump's policies could be severely detrimental for the economy. Zandi, for instance, projects that if Trump were able to implement his agenda in full, the economy would enter a recession that would persist for two years, and the unemployment rate would increase to 7.4 percent as millions of Americans lost their jobs.

Zandi and other economists say Trump’s proposal to place heavy tariffs on goods imported from China and Mexico would increase the cost of goods for consumers in the United States, reducing spending and slowing down the economy overall. Moreover, those countries could retaliate with tariffs of their own, which would limit the demand for U.S. exports and put workers in the manufacturing sector out of work, analysts project.

Additionally, Trump's immigration plan — potentially deporting all of the undocumented immigrants in the country, or at least making it more difficult for them to work here — would increase the cost of labor in the United States, again increasing prices for consumers, according to Zandi.

Other economists on both sides of the aisle dispute Zandi’s analysis. For instance, J.W. Mason of the liberal Roosevelt Institute in Washington has argued that if tariffs on China and Mexico prevented imports from those countries, U.S. manufacturing firms and their employees would be able to produce more to replace those foreign goods, limiting the effect on the U.S. economy.

Based on the response of markets so far, however, investors are less optimistic. Recent research by Justin Wolfers and Eric Zitzewitz forecast major losses on Wall Street if Trump were elected.

The pair noted that investors on stock markets have preferred Republicans in nearly every election since 1880. This campaign has been a rare and dramatic exception.