It has been a wild 48 hours for the global financial markets that has confirmed two truths that we see play out time and time again in both large and small ways on a regular basis: First, the market abhors uncertainty, and second, the first knee-jerk reaction is often the wrong reaction.
Heading into yesterday’s election, traders on Wall Street were all but certain that Hillary Clinton was going to win the presidency, and this gave them confidence in the future.
Alas, the wisdom of crowds is often as tone deaf as the wisdom of polls.
The Market Abhors Uncertainty
This confidence in the markets didn’t necessarily come because Hillary Clinton was the popular choice on Wall Street (although she might have been). It came because traders believed they knew what to expect from a Clinton presidency.
Investors felt they understood what policies Clinton would pursue and how those policies would impact the financial markets, which gave them confidence that they could choose the appropriate investments to both protect themselves from and take advantage of those policies.
Armed with this understanding, traders positioned their portfolios accordingly. Unfortunately for them, they didn’t know if they were positioned for a Donald Trump win. So when the numbers started coming in showing that Trump was likely to win, traders started scrambling to limit their exposure, causing a massive global selloff.
The selloff was less a vote of no confidence in a Trump presidency than it was a “batten down the hatches” moment for portfolio managers. It wasn’t a selloff because traders were sure the market was going to collapse, it was a selloff to limit exposure to the unknown.
The Knee-Jerk Reaction to Donald Trump
This selloff triggered a 5% drop in S&P 500 futures before a circuit breaker initiated a stoppage of trading, a 1.9% spike in gold prices as traders scrambled to put money in this safe-haven asset and a 9.3% drop in the value of the Mexican peso, as traders feared Donald Trump’s closed-border and trade-tariff rhetoric may hurt the Mexican economy. Those moves, however, have been short-lived.
Once Wall Street had a moment to catch its breath and assess the certainty of a Trump presidency, traders realized that, in their haste to protect their portfolios, they may have overreacted. Just because it wasn’t what they had planned on doesn’t necessarily mean a Donald Trump presidency is going to be bad for the financial markets. It could be — just like a Clinton presidency could have been — but that is still unknown.
With this thought in mind, traders now seem to be processing the certainty of knowing who the next president is going to be and are starting to reverse course.
The S&P 500 is rallying (see Fig. 1).
Fig. 1 — Daily Chart of the SPDR S&P 500 ETF (SPY)
Gold prices are dropping (see Fig. 2).
Fig. 2 — Daily Chart of the SPDR Gold Shares ETF (GLD)
The Mexican peso is recovering against the U.S. dollar (see Fig. 3).
Fig. 3 — Daily Chart of the U.S. Dollar vs. Mexican Peso Exchange Rate (USD/MXN)
We don’t have to look back very far to find a moment in the market that can inform our approach to today’s market. After all, it was not even five months ago that citizens in the United Kingdom voted to leave the European Union in a similar populist uprising — the Brexit vote.
As we all know, the market dropped dramatically in the two days following the shocking Brexit vote, only to turn on a dime and move above pre-Brexit levels in a short eight-trading-day span. Amazingly enough, we are still above pre-Brexit levels on the S&P 500, even after both the Brexit shock and the Trump shock (see Fig. 1).
As Wall Street continues to process the new reality of a Donald Trump presidency, traders will adjust, and the new lack of uncertainty may actually provide some short-term stability.
InvestorPlace advisors John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.
