Markets took it on the chin this week after trading in a tight range for almost two months. As the polls tightened and “The Donald” appears to have gotten back in the game, investors started to dump stocks. Is this a prelude to what will happen next week if the GOP candidate actually does win?
Clearly, a Trump win at this point is a long shot. Hillary Clinton seems to have sewn up the votes she needs out of the Electoral College to become the next president of the United States. The popular vote is another kettle of fish. Given that even the pollsters have little confidence in their own product, we can’t really rely on what they say. Besides, given the margin of error, the contest is just too close to call. That leaves the markets in a quandary.
This week’s market decline is also out of the ordinary. It is only the third time since 1928 that the stock market has lost ground a week before a presidential election. History says the average gain should have been around 1.8% but this week the opposite happened with the S&P 500 Index losing 1.1%. That same index has been down 8 days in a row making it only the second time that has happened in 20 years.
Popular wisdom also says that markets usually bounce in the weeks after an election, regardless of who wins, but history contradicts that notion. The stock market was down an average of one percent or more during the week after the last 22 presidential elections. Yet historical data has not been a good indicator of the market’s direction over the last few years.
If you haven’t already, I urge you to read yesterday’s column “Elections and the markets” for my take on the short-term impact on stocks given a victory by either Trump or Clinton. Suffice it to say, a Trump victory would be bad, while crowning Clinton would spark a relief rally. However, either way it goes, the impact would be at best short-term.
The Trump dump this week was simply the investor’s way of beginning to tighten the odds between the two candidates. Over the last two months, markets have traded in a tight range at almost record highs, as the polls continued to confirm the betting on Wall Street that Hillary would win. If the market gets it wrong, stocks will need to digest that new data. A Trump win could cost the market a further sell-off of 4-5%, in my opinion.
A Clinton victory, on the other hand, would probably be worth an almost equivalent amount on the upside. . My target on the S&P 500 Index, for example, would be 2,240, which is greater than a 6% gain. I am not in the camp that somehow the fate of the markets over the intermediate and long-term will be determined solely on who becomes our next president.
Once the initial results are digested, the markets and investors will quickly move on to the next event. That event will be whether or not the Federal Reserve raises interest rates in December. Believe me, as that FOMC meeting approaches, concern over the new president’s policies will take a back seat quickly.
I have mentioned in the past that in order for the Fed to raise rates the markets must be expecting the move. As of now, the betting in the bond market on a rate rise of one quarter of a percent is 80%. That gives the Fed the psychological green light to take action.
Pundits would have you believe that if the central bank delays, due to a Trump win resulting in falling global markets or anemic economic numbers, the financial markets would take that badly. I don’t believe that. In fact, I am somewhat worried about how the markets are going to digest another rate rise.
I still remember the rate hike of last December, which not only killed the Christmas rally, but in my opinion, caused an even worse sell-off in the first two months of the year. It was only after the Fed let it be known that they were backing off from further rate rises this year that the markets turned the corner.
But that is next week’s worry. Let’s get through this election first. I will say that so far this year markets have been following my game plan. As such, I am still looking for a single digit return this year. I see no reason to change that forecast regardless of who gets elected.