Elections can or cannot have profound impacts on markets. In Western democracies, they generally don't, because the differences in the positions of the candidates are more superficial than profound. In these more commonplace elections, one group of stocks or some select assets might benefit because the winning candidate has more favorable positions toward a certain industry, but the overall market is only minimally impacted or if the impact is bigger, it is very temporary. Occasionally, an election comes along where the potential changes of a new administration are macro in scope and the market can be affected for months or even years. In the short term, the biggest price changes occur if the market is surprised.

The 2016 U.S. presidential election is one that can have both short and long-term effects on the market. The contrast between Donald Trump and Hillary Clinton is stark. Clinton represents continuity and furtherance of trends toward free-trade, open immigration with multiculturalism, and environmentalism that have been widespread in the West for the last three to four decades. She has stated that her dream is a "Western hemispheric zone with open trade and open borders." Trump, on the other hand, represents the counter forces to these views. His election would represent a major policy shift and a different political future for the country.

This struggle is not unique to the United States, but is taking place in Europe as well. The free-trade EU and single-currency Eurozone is a quintessential example of an open borders policy. Nationalist movements that oppose these views have arisen in all EU countries, however. The ones that came in first or second in the most recent EU parliamentary elections include: the Front National in France, the Party of Freedom in the Netherlands, The People's Party in Denmark, SYRIZA in Greece, Sinn Fein in Ireland, the Five Star Movement in Italy, and UKIP in the UK. Some of these parties are on the Left and some are on the Right, so there is no clear liberal/conservative division when it comes to globalist or anti-globalist views. The political parties with anti-globalist views can be categorized as populist, nationalist and anti-establishment.

In the Western world, the political elites and mainstream media are almost universally globalist, but a large number of the ordinary people don't share these views. Today, a gaping hole has opened up between the two groups. The anti-globalist forces did not have great success until their big wins in the European parliamentary elections in 2014 (they took about 25% of all seats). The UK BREXIT vote in June 2016, when the British voted to leave the EU, was the real breakthrough. It has many lessons for the 2016 U.S. presidential election and provides some warnings for investors.

Almost the entire UK "establishment" was opposed to BREXIT, just as is the case with the U.S. establishment and its views on Donald Trump's presidential candidacy in the United States. Four major political parties - the Conservatives, Labour, the Liberal Democrats, and Scottish Nationalists - all opposed BREXIT. Only UKIP, which had a single seat in parliament despite having received 13% of the vote in the 2015 general election, opposed it. The UK mainstream media, also almost universally against BREXIT, and published a number of "doom and gloom" articles explaining the dire consequences of voting Leave.

The political polls indicated the Remain (anti-BREXIT) vote was ahead almost the entire time. Between 10 and 20 days before the election, the Leave faction pulled ahead. This was quickly reversed, however, and the stock and currency markets reacted with confidence that BREXIT would fail (at the time, I wrote an article saying that this market confidence wasn't justified: "No Justification For Big Rally on Latest Brexit Polls"). The last poll taken the day before the vote (by the polling firm Populus) had the Remain side ahead by 10 points. When they tallied up the actual votes, Leave won by four points - a 14 point difference from what the 4700 sample size Populus poll had predicted.

The UK stock, currency, and bond markets went into shock. The FTSE100 stock index, which had rallied strongly the week before the vote on the "good" polling news, was down 9% two days later. The British pound (FXB), which also rose before the vote, was down 11%. Bonds, which had been selling off, rallied strongly, with the yield on the 10 -year Gilt falling around 30%. Investors on the wrong side of the trade, and there were many, because the large investment houses in the UK and the U.S. advised their clients BREXIT would fail, had big losses.

How Stocks, Bonds, and Currency Reacted to BREXIT Vote

The blue line represents UK stocks, the gold line is the pound, and the black line, bond yields

The Bank of England (BOE) reacted predictably and tried to save the stock market with more liquidity. It didn't officially lower rates (to 0.25%, with a promise of zero percent) and increase quantitative easing until August 4th, although the move was well telegraphed to the markets. Bonds rallied earlier and the pound sold off further later. By October, bonds were heading back down with yields going higher because inflation was already beginning to accelerate because of the BOE's move. So, the impact of the BREXIT vote is still taking place, and there's more to come.

U.S. investors should take heed to the market consequences of the BREXIT vote and what it could mean for them. There are many similarities to the 2016 presidential election in the United States. Establishment interests are all lined up on Hillary Clinton's side. So much so, that a number of Republican leaders don't endorse or have rescinded their endorsement of Donald Trump. The mainstream media almost universally supports her as well, just as it was one voice on BREXIT in the UK. Yet, it's Donald Trump that draws massive crowds indicating widespread popular support (Hillary does not).

As a former pollster, I can state many of the polls showing Hillary Clinton ahead have over sampled groups favorable to her and are thus unreliable. It took me only two minutes looking at the list of 2016 presidential election polls published by RealClear Politics to find three blatant examples of this. The Republic/Morrison/Cronkite poll taken in Arizona and finished on October 15th showed Clinton five points ahead. Democrats made up 44% of the sample even though only 30% of registered voters in Arizona are Democrats (so, it was more likely Clinton was several points behind).

Two other polls substantially over sampled college graduates (a group that is very favorable to Clinton). These were the Christopher Newport University poll of Virginia voters finished on October 19th, which had Clinton 12 points ahead and the New York Times Upshot -- Sienna poll of North Carolina voters finished on October 23rd, which had Clinton 7 points ahead. In the Virginia poll, 60% of the respondents were college graduates, whereas the number for the Virginia populace is 35%. In the North Carolina poll the sample was 46% college graduates instead of 27%.

Traditionally, pollsters make greater efforts to take accurate polls just before the election because their reputations rely on the accuracy of the last poll taken (they publish this number in their marketing materials). This did NOT happen in the BREXIT vote in the UK. In fact, just the opposite occurred. It remains to be seen what will take place in the U.S. presidential election. Things may or may not follow the historical pattern. They might because there is movement in some pols toward Trump and this began before the October 28th revelation that the FBI opened a new investigation on Hillary Clinton. For instance, the ABC News Tracking poll had Clinton ahead by 12 points on October 25th, but she was ahead by only 4 points on October 28th and after the news of the FBI investigation came out her lead disappeared and she was one point behind on November 1st. 

The U.S. establishment has so far been quite confident of a Clinton victory, just as the UK establishment was confident that the BREXIT vote would go their way. I have already seen two articles saying Hillary Clinton has already won the election. It's not wise to declare victory before the votes are counted, however, as Thomas Dewey in 1948 and Jimmy Carter in 1980 would confirm (the pundits, polls, and the media had also agreed that they had won).

If Clinton wins, not much will happen in the markets in the days immediately following the election. If Trump wins, the markets will almost certainly not be fully prepared for this outcome. There could be a very violent reaction as happened after the BREXIT vote. The difference will be U.S. stocks will bear the brunt of the sell-off, and not the dollar. U.S. Treasuries are not likely to rally as much as UK Gilts did either. Unlike in the UK, the Federal Reserve will not be able to lower interest rates to save the stock market. Its only option would be postponing its predicted rate hike in December.

There are a number of strategies that investors can use to shield themselves from an Election Day surprise. The simplest would be to buy some protection in the form of out of the money puts on ETFs for one of the major indexes - DIA, SPY, QQQ, IWM. Simply shorting the U.S. or Mexican stock markets (Trump's election would be considered a minus for Mexico) would also work. ETFs that short U.S. stock indices include:  PSQ, DOG, ST, RWM, MYY, and SBB. The Mexican stock market can be shorted by shorting the ETF EWW.