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The most famous example of a shock US election result remains Harry Truman’s 1948 win over Thomas Dewey, memorialised in a photo of Mr Truman holding a newspaper whose headline erroneously gave the victory to his opponent.
As the eleventh hour approaches in this year’s fight, a narrowing of the polls has shaken investors’ confidence in a Hillary Clinton victory and forced them to contemplate the immediate fallout should Donald Trump’s divisive campaign take him to the White House.
The S&P 500 is on its longest losing streak since 1980, down for nine straight days. Gold, the quintessential haven asset, is back above $1,300 a troy ounce, while the equity market’s fear gauge, measured by the implied volatility of S&P 500 options, has burst above its long-term average of 20 in a move that has historically signalled an approaching storm.
That is also echoed in the corporate debt market, where the riskiest high-yield bond funds had the biggest withdrawal of the year in the week to Wednesday.
“Investors know that regardless of their personal feelings, Clinton is a known quantity. Trump simply is not,’’ says Marc Chandler, a strategist at Brown Brothers Harriman in New York.
Should Mr Trump win, the retreat from risk is likely to accelerate in the immediate aftermath. He is less predictable than Mrs Clinton, who has a long political record and a more detailed set of policy proposals.
The Republican candidate’s campaign has been marked by controversial comments on issues central to any investor: dollar policy, the international trade system and the sanctity of the US government debt.
Examining the sensitivity of various markets to changing odds on the outcome, Barclays analysts estimate that the US stock market could plunge as much as 13 per cent if Mr Trump were to win. Given that the property mogul is an unknown quantity in policy terms as well as governing style, it’s little wonder that investors are suddenly spending time recalibrating.
“This is a market that had been very comfortable with the projected outcome and now the projected outcome is at risk,” says Alan Gayle, director of asset allocation at RidgeWorth Investment.
Riskier assets may also not escape unscathed from a close result, one in which a candidate wins the popular vote but loses out in electoral college votes, or leads to a contested election. Havens like gold, the Japanese yen and Swiss franc will be in demand.
By contrast, analysts at Barclays forecast a 2 per cent to 3 per cent bounce in the S&P 500 if Mrs Clinton extends the Democrats’ hold on the White House into a third term. Indeed, the size of any “Hillary pop” is growing given the sell-off over the past week, according to Julian Howard, head of multi-asset solutions at GAM.
That said, some parts of the stock market may do less well under a President Clinton, investors say. VogelHood, an alternative data company that turns federal regulatory and lobbying information into signals for money managers, is advising hedge fund clients that biotech, pharma, oil, gas and banking stocks will probably come under “significant regulatory pressure” within the first 100 days of a Clinton administration.
Some money managers are already getting out of such sectors, or at least taking money off the table.
The healthcare and biotech indices have fallen 7.8 per cent and nearly 13 per cent, respectively, since the start of October. “We’ve reduced all our positions in sectors that might be affected by a different regulatory environment,” says Brian Singer of William Blair, an asset manager.
Of course, some investors say that a post-Trump plunge would deliver opportunities for active fund managers who, in general, have failed to outperform their benchmarks this year.
The selling across equities and corporate debt could well allow them to end 2016 in a brighter mood. “It’s impossible to reposition unless there is a shakeout,” says Richard Madigan, chief investment officer at JPMorgan Private Bank.
While equities have fallen as polls narrow, US government debt has fared better with benchmark yields dropping. Volatility across financial markets in the wake of a victory for Mr Trump could dissuade the Federal Reserve from raising rates next month.
However, whether Treasuries would provide a sturdy shelter is up for debate. The outlook for the $13tn market is less clear given Mr Trump’s loose talk of defaulting, and ambition to loosen the fiscal spigots. This would likely lift bond supply and fuel inflation, sending yields higher.
“I don’t know that Treasuries are going to be the safe haven asset in the event of a Trump victory,” says Russ Koesterich, head of asset allocation at BlackRock’s global allocation fund.
Mr Howard of GAM shares that view but is reluctant to pay for expensive hedges given that stock markets bounced back sharply following the scare over the Chinese economy at the start of the year and after the shock subsided of the UK vote to leave the EU.
“The lesson is that markets did recover,” Mr Howard says. Before polling day, “it’s time to do less rather than more”.
Gold has been a beneficiary of the tightening polls, and there’s more confidence that would continue if Trump prevails. The precious metal has gained 4.2 per cent since mid-October, while a gold mining ETF has rallied more than 10 per cent from its lows of last month.
A Trump win would propel gold 5 per cent to 7 per cent higher in a “knee jerk reaction”, analysts at Citigroup reckon. Their base case — Mrs Clinton wins, while the Republicans keep control of the House of Representatives and Democrats gain a Senate majority — would send the metal down 5 per cent, they argue.
If investors do have conviction around how gold will behave in the immediate days after the result, there’s also confidence over the Mexican peso.
The currency has been the most sensitive to fluctuations in the polls, with traders concluding that what’s good for Mr Trump is bad for the peso. Chunky daily moves have been the norm for months.
It lost 3 per cent of its value when Mr Trump, whose hostility to free trade would hurt America’s southern neighbour, was performing well in September and recovered during his difficult October. It’s been largely on the backfoot over the past week.
For most of the campaign, the peso was on its own as an FX barometer of the election. In recent days, though, it has been joined by other Latam currencies, notably Brazil’s real and the Canadian dollar, another big US trading partner likely to be affected by a Trump presidency.
“A Trump presidency has gone from highly unlikely to possible,” says Mr Chandler of Brown Brothers Harriman.
Additional reporting by Adam Samson