From a market perspective, the outcome for this week’s election is similar to the Brexit vote in United Kingdom earlier this year. That is, a binary event where one extreme outcome is likely to trigger several emotional responses. Remember much of the worry over Brexit prior to that critical vote? Wait, there was none? No, I don’t remember it, either. Leading up to the Brexit the polls seemed to be convinced voters would not push the referendum through.
In fact, lawmakers thought it was a joke – so much that many ridiculed the entire process until it came back to haunt them. As a result, Brits got their wish, their currency went into a tailspin as did markets for a few days. This was not a normal situation, and those who got bullish paid the price in the short term.
Those who were complacent in front of that event were caught and likely hammered the following couple of days. Of course, just three days henceforth markets recovered all of those losses and continued on a deep run toward all-time highs (around 2200 on the SPX 500). Volatility leading up to Brexit was strikingly low, little protection being bought prior. That turned out being messy, but the market volatility corrected back to normal within days.
How is the public viewing this election? Quite different actually. This binary event is being priced with fear and hesitancy, many not wanting to make that mistake from earlier this year. We have seen markets pull back sharply over the last several days and volatility roar higher, with the VIX (volatility index) spiking beyond 20%. Players are pricing in some sort of dangerous fallout from the election of either Donald Trump or Hillary Clinton. We like to see that sort of activity where the markets are trying to climb a ‘wall of worry’. With sentiment pretty much as poor as can be (fear gauge index is at 14, near extreme bearish readings), there is a good setup for markets to turn higher.
However, the explosion in volatility is going to have to play out through the uncertainty surround this election, but it seems there is a return to ‘normal’ behavior.
