Should we sell ahead of the election?

End of Day Analysis

It’s taken awhile, but the stock market is finally doing something! We’ve been mostly range bound since mid-summer, but traders are finally getting pre-election jitters and that nervousness lead to eight consecutive down days for the S&P500. What was previously viewed as a slam dunk win for Hillary is turning into a much closer race than most expected. It is still Hillary’s election to lose, but Trump is giving her a run for her money.

Last Friday’s FBI revelations are finally showing up in the polling data. Battleground states like Nevada, North Carolina, and Florida that were leaning toward Hillary last week have shifted ever so slightly in Trump’s direction.

While momentum is always a good thing, the Electoral College math still favors Hillary. In addition to taking the above mentioned states, Trump also needs to steal one of Hillary’s “firewall” states; New Hampshire, Colorado, Pennsylvania, or Michigan. Without one of those, the math simply doesn’t work for Trump no matter what is going on in FL, NV, and OH. At the moment, New Hampshire is Hillary’s most vulnerable firewall state and is more important to the outcome than the much talked about FL, NV, and OH.

While we can dissect the polling data a million different ways, the more important question is can we believe it? The biggest challenge in polling is counting the right people. Obviously we don’t want to ask a 12-year old who she will vote for. But what about a 34-year old male? Surely his opinion counts, right? Would we feel the same way if we knew he has never voted? So maybe we shouldn’t count him. But what if we find out he drove 5-hours to attend a Trump rally. Does that make a difference?

Voter intent is the hardest, yet most important thing to measure. This is especially critical in a historically unpopular election. We will have people who have voted in every presidential election since the 1970s skip this one because they find both candidates so deplorable. We will also have middle-aged, blue-collar workers vote for the first time because they are so passionate about Trump. Countless polling results are being thrown at us, but if they are using a flawed measure of voter intent, the polls everyone is taking for fact could be way off the mark.

Right now Trump has a one-in-three chance of winning. That means if we held three elections under similar circumstances, the favorite would win twice and the underdog once. This has nothing to do with the candidates and a last-minute surge, but reflects the errors that naturally arise anytime a small sample is used to predict the characteristics of a larger group. If we’re not asking the right people the right questions, our poll won’t accurately reflect the opinions of the larger group.

As we discussed previously, a Trump win would unnerve the market because he is the least understood major party candidate in modern history. While he is using this outsider status to his advantage to attract disgruntled voters, markets hate uncertainty and no one really knows what a Trump presidency will look like. Even though many people don’t like Hillary, the market prefers her because at least we know what we are getting. The market always prefers a damaged status quo over a wildcard. And if anyone doubts that, the market’s current bout of weakness largely coincided with Trump’s improving chances.

While all that Electoral College and Statistics stuff is interesting, what we really want to know is how to trade this. The simple answer is those that are in the market should stay in, and those that are out should stay out.

The time to sell defensively was weeks ago when everyone was comfortable. Reacting emotionally to a selloff rarely results in a smart trading decision. If someone has long-term positions, stick with them and ignore this near-term volatility. Contrary to popular opinion, the president has little influence over the economy and stock market. While we could see some volatility after the election as supporters of the losing side reflexively dump their stocks at a discount, that will be a better buying opportunity than time to get defensive.

If someone has cash, stay calm and continue watching. Prices might get even more attractive over coming days. But rather than fear impending doom-and-gloom, we should be greedily rubbing our hands together as emotional owners start giving money away. Risk is a factor of height and we are at the lowest levels in months. While no one can pick the exact bottom, it is less risky to buy today’s selloff than it was to hold last week’s benign sideways drift.

The widely expected Hillary win will be a relief to the market. While we might see Trump supporters dump their stocks in disgust on Wednesday, the relief of a conclusive outcome will no doubt keep any post-election weakness brief. A Trump win on the other hand will be a surprise and not something that is currently priced in. Fear of the unknown could lead to an extended selloff. But like I said, the president isn’t as important as most people think, especially one that has a strained relationship with Congress. Within two-weeks the market will go back to business as usual, which up until this week was hovering near all-time highs. If people want to give us stocks at a discount, it would be foolish not to take them.

Jani

If you found this post useful, return the favor by Re-Tweeting it.
If you disagree, tell me why in the comments.