Deadly Potion of Emotion

What a night on markets last night!  It was ‘risk on’ as the market re-fully priced in a Clinton victory.  The S&P500 surged 46 points, up 2.2% in one night and ending its longest losing streak since December 1980.  Gold and silver were down 1.7% and 1.2% respectively but the USD fell too which put the AUD up and gold and silver were down 2.3% and 1.8% respectively in AUD.  An emotions driven night….

Listen to or read any news this morning and a Clinton victory is ‘in the bag’ with a 3 point lead in the last polls.  It’s what the world’s emotions want to here.  You might, however, remember another vote in the middle of this year where the result differed to the polls.  Should the polls again prove to be wrong this will be “Brexit x 10”, as Jim Rickards puts it.  But let’s assume the cake is baked and Clinton gets in… what next for markets?

The US election circus has been one of the few distractions big enough to divert the markets’ attention away from its US rate hike preoccupation.  That said, part of what contributed to the S&P500’s historic losing streak these past weeks has been the now 80% market odds of a rate US rate hike in December.  Should Clinton get in we may well see a combination of ‘buy the story, sell the fact’ AND the inevitable sell down on rate hike expectations given a Trump win was about the only credible excuse not to hike in December.   Don’t dismiss either a Supreme Court challenge on the result, ala the 2000 election when Bush won 5-4 in court.  This time however we have the temporary situation of an even number of Supreme Court judges and the prospect of a split decision even there.  This could be a drawn out affair to test the emotions further…

Clinton represents ‘business as usual’ for the US.  As regular listeners to our Weekly Wrap know, ‘business as usual’ in the US is lacklustre at best and recessionary in reality for many sectors.  A rate hike makes no sense other than they need to do it to curtail the financial asset bubbles it produced.  So should the Fed actually go through with it this time (they’ve been saying “probably next time” for the last 10 months) you could very well see the same result as last December with a January crash.  January was a relatively little one as crashes go.  The system is even more ‘inflated’ now and so too the precariousness.  

It is easy to be emotionally drawn in by the latest ‘events’.  Last night shows how one ‘story’ to the next can swing a market in the short term.  A truly balanced portfolio, a mix of uncorrelated assets, takes the emotion out of investment.  Emotion is an awful investment input, and hence the famous quote:

“Those who beat the market beat their emotions first”