The 2016 presidential election is carving deep scars on the American soul. At this point, I’m ready for it all to be over.
The country is on the cusp of a constitutional crisis after the FBI reopened the investigation into Hillary Clinton’s use of a private email server. The reputation of virtually every individual and institution touched by this election is ruined – the media, Justice Department, FBI, the candidates, their surrogates and supporters, both political parties and those holding high office. Our so-called elites disgrace themselves on a daily basis. The nation will be left to pick up the pieces after November 8th. Financial markets are starting to react to the coming turbulence but remain dangerously complacent.
But that could all change very soon (as soon as tomorrow)…
Here’s what I see happening to your money – no matter which candidate wins.
Markets Aren’t Expecting Trump – And They Can’t Handle Hillary
U.S. stock markets demonstrated an amazing ability to ignore the unfolding political train wreck throughout the month of October. They began the month of November looking a bit green around the gills, though it is difficult to determine whether it was politics or nervous credit markets that were the cause. The high yield bond market has been selling off for about a week, with both large high yield bond ETFs (HYG and JNK) dropping for six consecutive days. Both ETFs only lost a couple of percent but the trend is not investors’ friend and high yield jitters often portend equity market weakness.
The real question is what happens if Donald Trump wins the presidency….
Other than mass hysteria among progressives and the breaking out of black armbands at CNBC, whose reporting on all topics is permanently discredited by its blatant political partisanship, equities could sell off sharply as investors wrestle with an outcome that was not priced in to the market. In that case, we can expect many of our favorite short positions to head straight down. You can get some of those recommendations here, here, and here.
On the other hand, if Mrs. Clinton slips through the back door, the relief rally that many expected may not materialize since her victory sends the country straight into political paralysis and constitutional crisis that leaves us vulnerable to geopolitical and economic threats. Since market valuations are already extended, the sell-off could be serious until cooler heads prevail.
If Hillary Clinton wins – and she still maintains an Electoral College advantage – she looks forward to a presidency paralyzed by investigations into violations of the Espionage Act, election laws, non-profit tax laws, perjury statutes and the like. Unlike Barack Obama, she won’t enjoy a two-year honeymoon in which Democrats control Congress and will have to work with Congress if anyone in Congress will risk their careers and reputations to work with her. Unfortunately, there are serious problems, such as the federal budget deficit and tax and entitlement reform, and social problems such as the unacceptable violence and poverty in our inner cities, that will worsen during the interregnum.
In other words, this election may very well be a lose-lose for the markets (but a win-win for us).
But as we’ve discovered repeatedly over the past few weeks, nothing is certain.
My year-end S&P 500 target is 2050-2100 though at this point I admit I have little confidence in my forecast. I would urge investors to reduce equity exposure in order to protect capital in this highly uncertain time and not try to guess what is going to happen.
But do keep in mind that there is the distinct possibility of a sell-off…no matter who wins.
See you on the other side.