Stocks surged on Monday, following the surprising news over the weekend that the FBI had exonerated Hillary Clinton for a second time on allegations that she misused a private email account while Secretary of State. The Dow was up 339 points, or 1.9% this morning and the S&P leaped ahead by 2.10% following nine straight down days. Even though the election is still 24 hours away, the stock market voted for a Clinton win a day early.
Markets hate uncertainty
There is nothing financial markets hate more than uncertainty. The surprise announcement on October 28 by FBI Director James Comey that the FBI had found emails on a computer belonging to top Clinton aide Huma Abedin and was examining those emails created lots of uncertainty.
The benchmark S&P 500 was down for nine straight days, the longest losing streak in more than 35 years. As Walter Todd of Greenwood Capital explained: “Investors are uncertain about the outcome of the election, and they have grown more uncertain since last Friday.”
Markets not endorsing Clinton
Along with stock prices moving up sharply today, bond yields and the dollar index were also up, and volatility was down, making it clear that the financial markets have decided that the FBI’s second letter on Sunday has removed the last vestiges of doubt about the outcome of the election.
Today’s upward move in the markets is not a political endorsement of Hillary Clinton, although some will see it as that. A Clinton election will ensure that the country’s direction will continue in a manner similar to what it has been under President Obama, and it is that absence of change that is fueling today’s upward move.
Trump would be unpredictable
If Donald Trump wins tomorrow, his election will create a great deal of uncertainty and the financial markets would most likely fall dramatically, similar to what happened in Great Britain after the Brexit vote. Part of Mr. Trump’s appeal to voters has been his unpredictability and financial markets hate unpredictability. Indeed, a win by Mr. Trump would shock financial markets around the world as his views on trade and the U.S. role in the world would mark a dramatic reversal of long standing U.S. policies.
Markets down day after election
The market is likely to have second doubts about Mrs. Clinton as well and today’s rally could be short lived as the reality of the election sinks in. Historically, the market has fallen the day after a presidential election and the month after the election is a time of uncertainty.
In the 22 elections going back to 1928, the S&P 500 has fallen 15 times the day after polls close, for an average loss of 1.8 percent. Stocks reversed course and moved higher over the next 12 months in nine of those instances. That doesn’t mean it’ll all be smooth-sailing for stock investors. Equity volatility in the November of presidential election years has historically been 22 percent above the average for all months. — Bloomberg Markets
While most of the country will have to wait another day to find out who won the presidential election, the financial markets have already priced in a Clinton victory a day early. We’ll find out soon enough if they called it correctly.