Once again the polls and the prognosticators were wrong, this time in dramatic fashion. As with Brexit, this is an excellent example of why Stadion has built its models around the belief that the market is notoriously unpredictable.
Prior to the election, the financial markets had ‘priced in’ a Clinton victory. But as votes were tallied, the probable outcome began to favor Trump, causing unprepared world equity markets to react negatively. The Nikkei 225 index lost -5.4%. The Hong Kong stock exchange Index fell -2.9% and the Shanghai Composite Index also went negative. The DAX German stock Index fell -1.3% and the IBEX 35 Index even more at -2.2%. On the currency front, the Mexican Peso fell nearly -13% at one point. In the U.S., Dow Jones Index futures were down as much as 800 points, and the NASDAQ Composite Futures Index and the S&P 500 e-mini Futures index were down as much as -5%.
To answer the question as to why world markets were shaken, let’s step back and assess major themes in U.S. markets.
U.S. equity markets have been trading at or near all-time market highs for quite a while. Valuations are at the high end of the spectrum, making U.S. equity markets likely overvalued. Investors understand that our central bank policy—supported by the current administration—has been a powerful force behind stocks trading at lofty multiples. Therefore, the market is sensitive to potential policy changes. Many considered a Clinton White House to be a status quo administration, and thus accommodative to the Federal Reserve in spite of the likelihood of continued growth in debt.
However, many view Trump and a Republican White House as fearful of the parabolic growth in the debt and balance sheet of the Fed and therefore non-supportive of the current accommodative policy. Trump has campaigned in part on his promise to reduce the national debt. Thus highly sensitive markets may fear an increased pace of Fed tightening in the short term, sparking a potential sell-off. More measured results yesterday morning seem to hint at a modified understanding that in the long term, Trump’s economic policies may generally be favorable for business, which could also mean that a correction when it occurs might be more accurately perceived as one that simply gets the market back to where it really should have been anyway.
We have been asked about the S&P 500 Futures market hitting its “Limit Down” trigger during the pre-market session on election night. At its lows the S&P 500 futures were trading down >5% at which point they went “Limit Down”, meaning trading was halted for the market to catch its breath. Futures subsequently rebounded, suggesting the Limit Down may have served its purpose.
As news rolled in on election night, the initial perceived near-certainty of Clinton victory faded, then gave way to the surprising reality of Trump’s win (in the all-important Electoral vote). Trading in stock market futures became a wild ride that reflected massive uncertainty. After all, no-one knows exactly how a Trump presidency will unfold. We could see a re-ignition of Reagan economics with pro-capitalism government or continued potential gridlock resulting in a burgeoning fiscal debt and higher rates.
Stadion keeps a keen eye on market developments through unemotional, technical processes designed to help us react should risk levels in the markets become extreme. Stay tuned for more updates.
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Past Performance is no guarantee of future results. Investments are subject to risk, and any of Stadion's investment strategies may lose money.