U.S. equities were in freefall on Tuesday night and into Wednesday’s early hours as it looked increasingly likely that Republican candidate Donald Trump would emerge with the 270 electoral votes needed to win the U.S. presidency. S&P 500 futures were off nearly 4%,
As I write this, Dow Jones Industrial Average futures are down 803 points and most U.S. indices have hit limit down. Other markets are being hammered in sympathy: The Nikkei futures fell more than 1,000 points.
It was a stark difference from Tuesday’s regular trading, where the markets finished slightly higher in follow-on trading following Sunday’s FBI announcement that the new investigation into emails related to Clinton’s private service had completed without any new revelations.
Defensive sectors led the way, with telecoms and utilities up 0.7%. Priceline Group Inc (NASDAQ:PCLN) gained 6.6% on a 4% earnings per share beat driven by a pickup in hotel bookings. Hertz Global Holdings, Inc (NYSE:HTZ) fell 22.5% on a disappointing Q3 earnings release and a cut to its forward guidance on lower-than-expected car rental volume.
A few hours later, markets descended into chaos as Republican presidential candidate started outperforming in early states including Florida, Ohio and North Carolina. The New York Times’ projection moved to a 95%-plus chance of Trump victory and stayed there.
It’s like Brexit all over again. But bigger.
Like Brexit, the pre-election polls were all showing Hillary as a shoo-in. And since she was viewed as the “status quo” candidate, this was viewed bullishly as witnessed by Monday’s big rally and the fact that Monday and Tuesday were the third-best pre-election rally on record.
But it’s all coming undone now. In addition to the S&P 500 futures collapsing, the FTSE is down 5%, the DAX is down 5%, crude is down 4% and the peso is down 12% to all-time lows.
Gold is up 4%, to the surprise of no one.
Also crashing are the odds of the oft-teased December rate hike from the Federal Reserve. Assuming financial market pressure continues into the New York cash session, which is all but assured, look for Fed officials to soothe nerves by downplaying chances of a policy tightening until financial market turmoil ends — as they did earlier this year in the wake of the Brexit uncertainty.
Stepping back, the election result is a massive surprise (very few polls showed Trump ahead in support) and a big electoral mandate for Republicans, who are on track to maintain control of the Senate and the House of Representatives. The last time Republicans held all three branches of power (White House, Senate, and House) was in 1928 when California Republican Herbert Hoover beat Democrat Al Smith from New York.
It will surely have major implications for the drivers of the stock market: earnings, economic growth, and interest rates as well as sentiment. For the last year and a half, Democrats and many Republicans have been using scare tactics to warn of the consequences of Trump rising to the presidency. So, the near-term panic is likely to be acute and powerful.
What comes after will depend, in large part, on the tone Trump sets in the days and weeks to come. Who will be his cabinet picks? What tone does he set with Mexico and China on trade policies and the border wall? Will he reconcile with Fed chairman Janet Yellen?
Time will tell. But for now, market volatility is likely as traders respond to the world’s largest democracy delivering a massive surprise to the political and economic establishment.
Watch for a triggering of circuit breakers when markets open on Wednesday. Level 1 breakers will be hit on a 7% decline, which is roughly a 1,283-point drop on the Dow.