Prior to the the UK’s Brexit vote in late June, I took a fairly apathetic view to the prospects of a Leave vote, and expected the people of the UK to vote to Remain in the European Union. On the eve of the vote I suggested (Cause I Don’t Want to Be… Anarchy):
The Bremain/Brexit referendum in the UK mirrors the Trump/Clinton match-up in many ways. Trump’s candidacy represents a similar itch to lay flames to the globalized status quo and roll the dice on a bit of isolationism anarchy. But as we’re seeing, the likelihood that a majority of citizens ultimately pick anarchy is lower that the media would prefer for ratings.
Leave narrowly won obviously, financial market chaos did ensue. The extent to which risk assets have rebounded since the immediate plunge is a matter of perspective. The FTSE 100’s nearly 10% drop the day following the vote came and went, the index had recaptured all of the losses in 3 trading days and was back at all time highs in a matter of months, ultimately being rejected at the prior high:
I guess this makes some sense. UK companies who sell their goods outside of the UK have benefited from the currencies collapse, down about 17% from June 24th, and down 40% from its 2008 highs:
In the past 2 weeks we saw 9 straight down days and an exploding VIX as polls tightened. And, yesterday we saw a 2.22% rally in the S&P 500 (SPX) following polls stabilizing and the announcement by FBI Director Comey that nothing found on Anthony Weiner’s laptop (!) changed the bureau’s view that Clinton’s use of a private email address for State Department business was worth pursuing in any significant way. Market participants have shown their hand in favor of Clinton, making the potential for a post Brexit collapse in risk assets that much more likely in the less likely event that Trump were to win.
Last Friday on CNBC’s Options Action we discussed portfolio protection into the election (this was prior to FBI Director Comey’s letter to Congress Sunday regarding Clinton’s emails), and once again I struck a fairly apathetic tone towards the potential for financial market anarchy following the election. At the time the SPX had done something it had not done in decades, it closed down 9 consecutive days. But the point that I made was that those 9 days of losses had equaled just 3.5%, placing the index down only 5% from its all time highs. That seemed pretty orderly to me. In fact the only real panic was in the protection market, with spot VIX making one of its quickest 10 day rises of just over 70%. Interestingly, the SPX stopped on the chart where many might have expected it to, right at a prior breakout level and its 200 day moving average:
For those who want to make a bet for financial anarchy here in the U.S., in the lower probability outcome that Trump wins, or Clinton doesn’t win by enough and the victory can be contested, then it’s worth noting that SPY options that expire on Friday’s close are pricing about a 2% move in either direction between now and then. Seems fair. For those looking for a lotto ticket, or merely a short term hedge, the SPY 213 puts (vs stock ~ $213) closed yesterday at ~$2.10, about 1% of the SPY’s price, in dollar terms I’d say that’s cheap as chips!
On a side note, it’s not just the White House we’re voting for today. And If the election does go according to betting markets and poll aggregators, we may be discussing something else for the next few weeks, and that’s a drawn out recount for control of the Senate. The best investment right now may be in lawyers, because thousands of them could be converging on New Hampshire, Nevada, North Carolina, Indiana, Missouri and/or Pennsylvania. Those races are all very tight and control of the Senate is at stake with most models showing about a 50/50 split with whoever wins the White House with the tie-breaker in the case of 50 seats held. When the election is over and we start to think of stocks not in their entirety as to who they want in the White House, we will probably quickly pivot to what sectors are affected and how based on the makeup of Congress as well.