The US election: what does it means for the markets?
For many Americans the US presidential election is a chance to elect the lesser of two evils. There was a time the result was too close to call, but this now seems a distant memory. With polls and experts saying Clinton has an 80% chance of winning, and some major bookmakers already paying out over £1m on a Clinton victory, it seems all but over.
What would a Clinton administration mean for the markets?
Many experts predicted a Trump win would cause a major sell-off in the indices. With the S&P 500 and the Dow hitting record highs, investors would look to take profit and re-assess the global outlook with the leader of the free world such an unknown political quantity.
Clinton, on the other hand, seemed the darling of Wall Street, with many Fortune 500 companies backing her campaign. (Notably not one single company backed Trump.) So does this mean stocks will rally?
The problem with stocks right now is that they are the only place to put your money to get any sort of return. This means they are clearly overbought. Investors no longer see stocks for what they are, a ‘risky’ investment. Instead they expect the Fed, BOE and ECB to step in to ‘fix’ any problems.
History teaches us the error of this view. In normal market conditions we see a correction on average every six years or so. The central banks have however taken extraordinary measures such as ultra-low rates and QE. Now, nearly a decade after the credit crunch, we’ve clearly passed the point of no return for any reasonable correction. This means the next crash, correction, or whatever you want to call it will be unlike anything we’ve really seen before.
How steep will the sell-off be?
In my opinion, once Clinton becomes president this is ‘known’. For me and many out there Clinton was always going to win, so this is ‘priced’ into the market. The logical consequence is, once investors know the result, for stocks to react in a positive manner. However, as many investors have pushed up the markets prior to this highly anticipated outcome, I believe a sell-off in stocks is inevitable.
I don’t see this being a major sell-off at first. I would say the S&P breaks below 2100 and bottoms out in the short term around or just below 2000. In the medium term, after some consolidation around Q2/3 2017, I see a major sell-off in the S&P. The index could hit 1906 and then smash the lows at 1807 before settling around 1610.
What are the wider issues?
I predict a severe test for the euro post Article 50. The risk that other EU member states will suffer ‘Brexit contagion’ is high. After the wheels fail to fall off the UK’s trade deals, I see the pound regaining ground above $1.30 (GBP/USD). In turn I would expect the euro to break below $1.05 (EUR /USD) and really start to eye up parity at $1.00.
All in all, the US election is a done deal by the markets’ reckoning. I think 2017 will be the year the world wakes up to some of the central banks’ ‘sticking plaster’ remedies and ‘free money’ fixes.
Chief Market Strategist, Intertrader
The content of this article is the personal opinion of the author and not Intertrader. You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.