The US Presidential Election Is Not A Brexit Moment

There have been a number of comparisons drawn from the event risk around the upcoming US presidential election and the Brexit referendum earlier this year. There are a number of similarities, most notably in the market reaction to changing poll numbers prior to the vote, but also a significant number of crucial differences which make trading strategies around the US election different from those around Brexit. 

Trump Victory Triggers Risk Off 

The reactions of financial markets to polls that suggest an increased probability of a Trump victory have seen traditional “Risk Off” moves; sell stocks, buy bonds, higher implied volatility, buy gold. We are not going to discuss if these moves are reasonable, the pattern has been consistent and therefore it is reasonable to presume that in the short term this is highly likely to be the reaction we will see on Election Day as the results trickle in. 

This is similar to the reaction caused by increased probabilities of a “Leave” vote into Brexit, with risk assets also under pressure. As the votes came in with a significant bias towards “Leave”, risk assets were heavily sold, and this increased as the result became clearer. To put the move into context, interest rate futures began to price in a chance of a cut from the FOMC, when just days before there were calls for a hike at the next meeting. 

Black Swan Event

We have been asked a number of times, “How can we prepare and protect against a Black Swan event like a Trump victory?” It is not a Black Swan event. A Black Swan cannot be predicted. The very fact that one is discussing how to deal with a Trump victory means it is not a Black Swan. 

It is not even a “tail risk”. A tail risk is the risk of a very unlikely event according to a probability distribution. For example, the stock market moving 10% in a single trading session, since most observations have movements lower than 10%.

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Jimmy Richards 3 years ago Member's comment

Nice article, I agree that the constant comparisons to #Brexit are getting tiresome. While there are of course some similarities, there are far more that's different. The whole comparison argument is feeling forced.

Chee Hin Teh 3 years ago Member's comment

thanks for sharing