Election Day and the Market: What to Expect

I pretend to know what I’m talking about and give market-related predictions based on today’s election results

Despite all signs of the apocalypse approaching, we have finally made it to Election Day, and at last check, the sun has still not exploded; a win for humanity, perhaps. I won’t pretend to tell anyone how to vote (but yes, you should go out and vote). I won’t pretend to know how to tell someone how to invest/trade their money (I am not licensed to do so, nor do I know what I am talking about…), but it’s always fun to make some Election Day guesses and trades because of the associated uncertainty, volatility and imperfect information out there. At the end of the day, markets are just a clearinghouse for imperfect information, hence the constantly changing prices of stocks, commodities and many other financial instruments. If we all knew what Event A would do to Stock B’s price, it would stay at that price without intraday fluctuations.

Anyways, back to the elections. There are two (or three) significant events that “the market” is likely focused on during this election: 1). which candidate wins the presidency; 2). which party controls the Senate in the 115th Congress; and 3). which party controls the House (although Republicans are expected to maintain control of the House majority). For all intents and purpose, by “the market,” I mean the stock market, and more specifically, the S&P 500.

Looking at how the major stock indices have performed over the past week or so is a great indication that a Trump victory would likely be negative, at least in the short-term. When FBI Director Comey released the letter to Congress regarding the possibility of new controversy surrounding Secretary Clinton’s emails, the market was not happy and continued its sell-off for nine straight market days. On Monday, stocks rebounded significantly as a Clinton victory looked more and more likely, and markets are rather indecisive today, Election Day, as we all await the results tonight.

Despite the higher likelihood of a Clinton victory, investors are still waiting for clarity on the election results and what exactly a Clinton presidency would mean for policy, regulatory actions and many other investable items. This will also likely be a “sell-the news” type of event. I’d expect further strength into the close today as anecdotes of voter turnout and other reports come in, but the trader in me expects to see a 3-5% drop in the S&P 500 over the next week or two following the election as investors realize that a Clinton win was already “priced in” (as much as I hate that term). If Trump somehow pulls off a victory, the drop would likely be greater, in the 5-7% range.

Longer-term, if we still experience a divided government (Clinton in the White House and Republican control of Congress), the market will rebound rather quickly and likely hit new highs into year-end. If Democrats win control of the Senate, while still a divided government, stocks will likely not bounce back as quickly, in my opinion, but there will continue to be upside bias into year-end.

All that being said, never bet the farm on one event. Stay diversified, stay hedged. Trading on short-term events carries significant risk and only an idiot like me would pretend to think they can outsmart the market or make trades that are not already priced in, which also means that I am not an idiot betting everything on the election, but I enjoy sharing my opinions sometimes (which can be VERY humbling when I am 100% incorrect).

Steven Harris Election Predictions

  1. Clinton wins: 308-230 Electoral College votes
  2. Republicans hold the Senate: 53-47
  3. Republicans maintain control of the House

Steven Harris Election Impact: Predicted Ranges in the S&P 500

  1. Clinton wins; Republicans control Congress: initial overnight pop in equity futures, sell-off into the morning; S&P 500 retests the 2050 level before Thanksgiving (bounces back into year-end)
  2. Trump wins: market sells off hard; S&P 500 at 1950 becomes a reality over the next few weeks
  3. Clinton wins; Republicans control House, Democrats control Senate: similar to scenario 1 - initial overnight pop in equity futures, sell-off into the morning; S&P 500 retests 2000 (rises into year-end, albeit at a slower rate)

Deep Thoughts
This is a historical election, and I don’t mean to discount that by condensing it into a trade, but whatever change we see after today’s elections will have a real impact on our economy, our trade relations and many other areas that affect workers, companies and policies throughout the globe.

Disclaimer: Any opinions expressed here are for entertainment purposes and should not be considered investment or trading advice. All investing carries risk and you should talk to someone far smarter than me before making investment decisions.