Perceptions about the US presidential election have a major impact on markets. The recent news about the FBI not probing Clinton’s emails any further drove US equity markets up by 1% to 2%. Over the last couple of months, stock markets have moved down when Trump is gaining in the polls and up when there’s good news for Clinton.
But what happens if there is no clear winner in the 2016 US presidential election? Jared Dillian, ex-head of ETF trading at Lehman Brothers, says a delayed outcome is the most likely result of the election. Beyond that, this delay will lead to volatility in the markets.
In a recent interview with Mauldin Economics, he argues that most analysts believe there will be a lot of volatility prior to the election, then trading in markets returns to normal afterwards. While this might be true in a normal election, Dillian says this election is not normal and to expect a delay of a few weeks before a winner is known.
Noting that Trump has already said he will not concede, Dillian argues it is also likely that Clinton will not concede if Trump ekes out an electoral vote victory. He mentions several other things that could lead to a post-election delay, such as a victory by a third party candidate in Utah or New Mexico, or lawsuits about voter access or election fraud.
As Dillian notes: “People are used to having a peaceful transfer of power in the US, but … this is the last election to be betting on that.”
Equity markets down during delay in 2000 presidential election outcome
Dillian says that we may see a repeat of the long delay after the 2000 Gore-Bush presidential election. He also points out this uncertainty could hurt financial markets. He notes: “…there was a lot of pressure on equity markets for weeks after the election in 2000, and that’s a good precedent for what could happen here.”
Best way to cash in
When asked about the best way to play the election and profit from the shaky markets, Dillian said to avoid “volatility ETFs” that have built in “hidden risks” making them very risky.
He goes on to suggest the best plan is to “use plain vanilla calls or puts” with delta exposure, so you avoid the hidden risks in volatility ETFs like term structure and skew. While not a “pure vol” play, by using puts / calls you are “making a plain bet on the direction of the market and volatility.”
Dillian ends the interview by saying: “I will be very surprised if we have a clean winner on Wednesday morning.”
Watch the full interview (4:26) with Jared Dillian below.
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