America goes to the elections on Tuesday, November 8, and the next president of the United States will be either Democrat Hilary Clinton or Republican Donald Trump.

At this stage, Clinton is favoured to win, but Trump has been clawing back the lead in recent weeks. In two recent polls, the Republican was in the lead, and that may be why our markets are tanking.

In lunchtime trading, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is down 1.4%, and 3.9% over the past five trading sessions.

There are a number of reasons why the markets are nervous about a Trump win.

  1. He appears unpredictable, rash and quick on the trigger finger. Will he really build a wall between the US and Mexico and ask the Mexican government to pay for it?
  2. Trump plans to revitalise American manufacturing and create jobs by imposing high tariffs on imported goods. But that plan could backfire, send the country into a recession and cost an estimated 4 million jobs.
  3. Trump has campaigned to tear up trade agreements with several countries and regions, which could unleash a trade war. Mind you Mrs Clinton also opposes the Trans-Pacific Partnership (TPP) deal with 12 countries including Australia.
  4. Plans to lower corporate taxes and repeal the ObamaCare Affordable Care Act would give both companies and consumers more money under Trump’s plans – which could be positive for the economy.
  5. Anti-trade policies could cause a sharp slowdown like Britain is experiencing following the Brexit decision.
  6. Simon Johnson, the Massachusetts Institute of Technology economist, thinks a Trump win will even send Europe into recession, “precipitating a serious banking crisis”.
  7. There’s a level of uncertainty around Trump and markets hate uncertainty. Clinton represents the current establishment – which markets are familiar with already.

Some analysts even think a Trump win would be good news because traders would bid stocks higher in the hope that he gets those policies through.

Despite the positives for the markets from a Trump win, it seems the downside risk is higher, and we could see stockmarkets around the world sink.

First in line to feel the effects would be Australia’s big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC), given the threat of a global recession or banking crisis.

So what are investors to do?

It’s the same solution. Be prepared before it happens.

Make sure you have cash on the sidelines to pick up the bargains that are sure to be had if the markets swoon. Make sure your portfolio is well diversified, with earnings from several different sectors including offshore markets and defensive sectors.

All that’s left to do is hang on tight and wait for it to pass – as it surely will.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.