Grexit, Brexit, Trump?


November 8, 2016, 4:00pm EST

As we head into the election, everyone involved in markets is trying to predict how stocks will perform on the results.  When the Clinton email scandal bubbled up again, the stock market lost ground for nine straight days, the longest losing streak since 1980.  Since the probe has allegedly ended, stocks have been up.

Does it mean Clinton is good for stocks and Trump is bad for stocks?  Not likely.

Big institutional money managers think they have a better understanding of what the world will look like under Clinton than Trump, and therefore feel more compelled to go on with business as usual heading into the event (i.e. allocating capital across the stock market) with the expectation of a Clinton win, and conversely, they’re not as compelled to do so with the expectation that Trump might win (i.e. they sit tight and watch).

When they sit on their hands, liquidity in markets shrinks, and speculators can push the stock market around.

With that, is there any predictive value in the either moves in stocks of the past two weeks?  Not likely. No matter what the outcome, your 401k money will continue to flow to Wall Street, and stocks will be bought with that money.  Moreover, central banks have been in control and remain in control. They’ve been responsible for the global economic recovery of the past nine years, and for creating and maintaining relative economic stability. And stable to higher stocks play a big role in the coordinated strategies of the world’s biggest central banks.  Neither the economic recovery, nor the stock market recovery can be credited much to politicians.

If anything, politicians (both parties) have been a drag on recovery, which has lead to the threatening “stagnation forever” malaise that is saddling economies across the globe.  From mis-spending early fiscal stimulus, to ignoring central banks cries for much needed targeted spending programs, they’ve proven to be an impediment in the economic recovery.

In this environment, in the long run, the value of the new President for stocks will prove out only if there’s structural change.  And structural change can only come when the economy is strong enough to withstand the pain.  And getting the economy to that point will likely only come from some big and successfully executed fiscal stimulus.

Now, as we head into tonight’s results, as we’ve been told, a Clinton win remains the clear favorite (a known quantity).  And Trump has always represented the vote that the unknown is better than the known.

This vote for some time has looked very much like the Brexit vote (the UK’s vote to leave the European Union), and the Grexit vote (Greece’s vote against austerity). As with the Trump vote, the buildup to both Grexit and Brexit were accompanied by threats from trusted officials of draconian outcomes for the people.  But as we know, the Greek and British shocked the world by voting for the unknown, over the known.

Let’s take a look at how things looked going into those votes and how it compares to today’s election…

As we headed into the Greek vote in July of last year. It was thought to be a done deal that the Greek people would vote in favor of another bailout package from the European Union (and accept more austerity for fear of an apocalyptic outcome from voting no). The bookmakers put the “yes” vote at 71% chance of occurring. A UK bookmaker paid out those voting “yes” four days before the vote.  The “no” vote won, shocking the world with 61% of the vote.

And then there was Brexit …

The UK vote was about trade, immigration, ability to work and live in other EU countries — perhaps mostly about control and politics.

The bookmakers had the chances of a “leave” vote as slim (at about 70/30 favoring the ‘stay’ camp).  When voting day arrived, the chances of a “leave” vote had dropped to just 25%.  But the British people shocked the world, voting to leave by 52% to 48%.

Going into today’s vote, the chances they’re giving Trump are spot on with the Brexit odds going into the day of the referendum.  Of course, it’s not a popular vote.  The electoral vote creates a bigger hurdle for voting the candidate of the “unkown” in this case.

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