Brexit-like election risk up after stock market rally

Brexit-like election risk up after stock market rally

Republican presidential candidate Donald Trump speaks at a rally Monday, Nov. 7, 2016 in Leesburg, Va. (AP Photo/Alex Brandon)

It's possible, some Wall Street experts say, noting that the too-close-to call U.S. election has many of the same traits as the Brexit vote, namely polls that may not be totally trustworthy, a populist movement and angry electorate, and investors that are betting mainly on their base case: in this case a Clinton win and a split Congress. (Clinton is favored by Wall Street as she is viewed as more status quo, in contrast to Trump who is feared by investors due to his unpredictability and his negative views on free trade.)

"Most analysts seem to agree with the markets that a victory for Hillary Clinton in the U.S. presidential race is good news for the dollar, stocks and risk assets," Fawad Razaqzada, market analyst at Forex.com, told USA TODAY. "This is a very risky assumption to make. An even riskier assumption to make here is to convince ourselves of a Clinton victory now that she’s in the clear with regards to her email issues. The polls are still very tight and a lot of people will have made up their minds already, regardless of the FBI probe. So a win for Donald Trump is still a big risk which may be under-priced (in markets). The key point: don’t assume anything; be prepared, flexible and nimble in the coming days."

According to RealClear Politics, Clinton leads Trump by 2.4 pts, based on an average of about a dozen different presidential polls focusing on a four-way race that includes independent candidates. History still says Clinton is at risk, as the incumbent party candidate normally loses the election when stocks are down in the three months heading into Election Day. The S&P 500 stock index is down 2.6% since Aug. 8.

Monday's rally could easily be unwound Wednesday if Trump wins. Keep in mind, the first trading after the Brexit vote, the S&P 500 plunged 3.6%. And the second day after the vote it fell another 1.8%.

With the FBI removing the email cloud from Clinton, "financial markets will probably double down on Hillary winning," says Luke Hickmore, senior fixed income manager at Aberdeen Asset Management.

And that's risky.

“No one should conclude that this campaign is over or that Hillary is going to win," Hickmore said. "Financial markets are edging towards Clinton largely because of polling and we saw in the U.K.’s Brexit referendum how wrong that can be. The memory of that referendum should loom large in investors’ memories because so much of the polling was wrong then."



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