Election 2016: Surprise and The Improbable

No matter where you lie on the political spectrum, the outcome of the 2016 election was a surprise to most people. The media got it wrong; the polls got it wrong and even the betting market (where real money is at stake) had the odds of a Clinton win at 80% as the polls opened. States that were sure things ended up flipping with no advanced warning. The markets had priced in a Clinton win. As usual, when the market prices in one thing and something else occurs, it gets surprised and needs to re-price. This may happen with the election as it often happens with corporate news and earning surprises.

Surprise!

Our brain, which is made of gray matter, hates gray areas. When we are given probabilities of outcomes, the brain likes to extrapolate that into certain outcomes. So when Clinton was given an 80%+ chance to win, the brain may have likely concluded, “Hillary is going to win”, which unconsciously tells our brain it is a 100% certainty…and causes great surprise when the “unexpected” happens. When it comes to probability, in any aspect of life, if there is at least a 1% chance, it’s saying it could happen…so while improbable, it’s not within the realm of impossible.

Surprise often causes us to make knee jerk reactions…and sometimes those knee jerk reactions result in poor judgment. When it became obvious Trump would win last night, the futures markets sold off to the tune of about 4%. At the time of this writing, before the markets open, it has pared the losses to less than 2% for the major US indexes. Where will it go in the future?  No one knows for certain, but many will give you their opinion.

Next Steps

The market will now need to price in what a Trump victory means. He made a lot of claims about going to battle against China (economically) and re-negotiating trade deals among other things. This could impact multi-nationals. But we must consider whether he will really do that, if he is actually able to do that and what would be the end result of those actions. Lots of unknowns.

The best thing to do now is make sure we don’t act rash. Let’s take time and assess the situation. There will be many opinions and the media will have a heyday with this. Our own natural reaction may be to sell, especially if the markets go down. Even if the markets do go down, could that not be an opportunity to buy low? We always talk about buying low; a market that overreacts to a surprise could give us that very opportunity.