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Profiles in Uncertainty: Election Night Lesson in Market Dynamics

November 10, 2016
Market volatility and investment advice during elections.

Donald Trump’s surprising presidential victory can offer investors a great lesson about how the stock market works, one they can take with them way beyond the election.

Capital markets are, for the most part, resilient. But one thing they cannot stand is uncertainty. As election night unfolded, uncertainty reigned, and markets reeled. Once a victor emerged, uncertainty diminished, and the markets recovered, at least for the moment. Going forward, investors can learn from this by remembering to tread prudently during volatile times, and by understanding that once uncertainty eases, volatility tends to retreat.

It may not have been the prospect of a Donald Trump victory that caused S&P 500 and Nasdaq futures to plunge to their 5% circuit breaker limits in overnight trading as election results came in. The uncertainty about whether there’d be an immediate victor actually could have been more responsible for the big drop, as investors shuddered from memories of the 2000 election and the month-long vote count battle that followed. The widespread idea heading into the night, at least judging from polls and prognostications, was that Hillary Clinton would take the presidency. Once Trump began pulling closer, and results became more uncertain, the markets crumbled, with Dow Jones Industrial Average (DJIA) futures falling more than 800 points.

“The fluctuations Tuesday night and Wednesday morning show that the market doesn’t like uncertainty," said JJ Kinahan, Chief Market Strategist, TD Ameritrade. "When the S&P 500 fell 5% it wasn’t because (Trump) was going to win, but because the results were so close, with a number of states too close to call. Would one of the candidates concede? Would there be recounts and lawsuits? Then, when Trump eventually won, markets settled down and then rallied. Markets like certainty no matter what the result is.”

Perhaps the nine-day string of down days in the S&P 500 Index (SPX), which ended the day before the election and was accompanied by a dramatic rise in the VIX, may have also been more about uncertainty than any particular candidate and potential policy impacts.

Certainty about the election result doesn’t make the market a whole lot less dangerous for the individual investor, but it does remove a massive boulder that had been hanging over everyone for several months. In this environment, it still pays to tread carefully, because uncertainty does remain, particularly in regard to Trump’s potential trade policies, which some analysts have called protectionist in nature. Anyone putting money into the market in the coming days and weeks might want to be prudent about how much to invest, and it goes back to that same uncertainty factor.

“Review your portfolio, and if there are areas you think might do well, you nibble; don’t go all in,” says Kinahan. “Markets have a history of retesting overnight lows in regular trading hours. That may not happen in just one day, but caution is prudent. Let things shake out.”

Kinahan added, “This shows staying with your longer-term investment plan is important. That is, shut out the noise.”

The U.S. equity markets are only part of the story regarding how markets reacted during the uncertainty and the prospect of a Trump presidency. For example, equity markets throughout Asia, specifically Japan, were especially hard hit. And when the U.S. markets came raging back, Japan remained down over 3%. Another big mover was the Mexican peso, which fell over 11% in overnight trading. When the dust settled, the peso was still down about 8%.

Another big election night mover was gold, which was up about $64 an ounce at one point to $1340, before falling back below $1300- near the middle of its recent price range.

There’s an assumption that the banks, the major oil companies, the biotech and major pharmaceutical companies, and companies with large cash holdings overseas (which includes many mega-cap technology companies) could fare well under a Trump administration, said Patrick O’Hare, chief market analyst at

Other groups, like the managed care and hospital management companies, may not do so well, based on the assumption that the GOP will move to repeal the Affordable Care Act.  In turn, export-oriented companies could get pinched by worries pertaining to protectionist trade policies, O’Hare wrote in a note early Wednesday.

Kinahan pointed out that the market may have favored a Hillary Clinton win only because investors were more familiar with her policies and Mr.Trump is still a bit unknown. Could that mean further uncertainty ahead? All the more reason to take caution.

Markets sometimes offer their best lessons during times of stress, such as on Nov. 8, 2016, as the world moved from the expectation of a Hillary Clinton presidency to tremendous uncertainty about the outcome to the realization that the next president would be Donald Trump. As the markets reeled, gyrated and ultimately rose, we may have gotten a glimpse of where the pressure points lie. Ironically, when future generations look back upon long-term charts, November 2016 may look like a run-of-the-mill trading period, as the period after the 2000 election looks now. But for those of us who witnessed these election periods first-hand, they offered eye-opening lessons in market dynamics.   

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