When we previewed the 2016 Presidential election two issues ago, several of our analysts expected that a victory by Donald J. Trump would create a massive selloff in the market followed by a rebound based on the likelihood his election would result in an increase in government spending and a reduction in taxes. President-elect Trump has promised a massive infrastructure project as well as large tax cuts. While the analysis of his tax and spending proposals concluded that it would lead to a massive increase in our deficit, that would be positive—at least initially—for markets.
Lawrence McDonald — who predicted a Trump victory — said that a Trump victory would produce a “big risk-off trade” followed by a “big risk-on” trade. Not sure if he expected it all to happen within 24 hours, but it did (see “Risk-on/risk-off” below).
What seems apparent from this and other recent market shocks is that information in today’s world is processed rapidly and market reaction cycles have become massively compressed. What many of our analysts expected to play out in the case of a Trump victory over weeks or months, appeared to happen within 24 hours. The market sold off in a panic and rebounded immediately, with the Dow Jones Industrials Average challenging its all-time high the following day and surpassing it by Nov. 10.
This says something about or high-frequency trading world and its ability to process information and analysis. It is also may be a cautionary tale for traders. Informational and analytical edges are ephemeral. Don’t assume your edge will hold up beyond the overnight session, let alone an entire market cycle. Many traders may have to rethink their strategies with the knowledge that market reaction time continues to compress, and all market participants have access to most information out there.
GOP victory vs. cannabis victory:
What is most interesting regarding this year’s election has to do with our cover theme on the emerging legal marijuana sector. If you didn’t notice—and some of us were distracted—the election was also a giant victory for the cannabis industry.
However, there is burgeoning conflict in this pair of results. The Republican Party retained both Houses of Congress as well as winning the presidency, and has not been a friend of the legal marijuana industry. Trump has indicated support for medicinal marijuana and given the populist nature of his appeal and his understanding of broad cultural trends, one might suspect that he would support the sector though he hasn’t been a champion of it to date. But with the entrenched nature of the GOP’s position on marijuana, you would not suspect that he would pick a fight over this issue. However, if the election revealed anything about Trump it is that he is unpredictable, undisciplined, has a penchant for seeking revenge and has been known to pick unnecessary fights in the past.
Will he join with the Republican majority and push their advantage acquiescing to most of their policy positions, or use his victory — gained without the support of broad swaths of the GOP establishment — to settle scores? No one knows, but the marijuana sectors would appear to be an interesting test case. A canary in the coal mine, so to speak.