BNY Capital Market Perspectives

Post Election Roadmap – Rate Hikes Still Ahead

We have all just lived through an unprecedented election cycle, which despite access to the most sophisticated modelling tools has taken the citizens, politicians, and markets by surprise. There was certainly evidence that investors were far more comfortable with a Clinton presidency rather than a Trump presidency, with risk taking and selling over the past few weeks driven by the prospects for each candidate assigned by the polls. This was evident as markets strengthened during the debate process, weakened following the announced additional reviews being taken by the FBI and most recently, recovering earlier this week on benign findings as part of that FBI review. Whether these strong moves were appropriate is certainly one of the many question facing investors today and in the future. Since markets hate uncertainty, the lack of solid policy planks to evaluate candidate Trump have made valuing assets especially challenging. This will soon be in the past as we will quickly learn what has been political rhetoric and what will make its way into a policy focus. Investors of course do not have the luxury of waiting to see how it all unfolds and have been making decisions based on the information we have been presented. The performance of assets classes over the past 48 hours reveals how challenging this may be, with a visceral response overnight which has been mostly reversed today. The chart below attempts to present the volatility in various key asset classes from the perspective of their close yesterday, their most volatile trading point overnight and where they stand today. For instance, the S&P found itself closing at 2,136 yesterday, subsequently traded to 2,029 around midnight when the odds of a Trump presidency rose significantly. It’s worth noting that this overnight low point was constrained by a limit down circuit breaker, so we could have seen stocks trade even lower. This volatility has proven short lived however, as stocks are now over 1% higher from yesterday’s close, and the Vix is now back down to 15 after spiking as high as 22 late last week. This pattern can be evidenced in a number of asset classes, with the initial 2% overnight weakness in the USD completely reversing today as the dollar now trades 0.6% stronger. The yen has followed a similar pattern, strengthening almost 4% overnight, which has also completely reversed and is now weaker by 0.7% on a day over day basis. The same can be said of gold, which was 5% stronger at $1,337/oz but is now mostly unchanged at $1,272.

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