Looking at the markets and the US election:
- The markets are far too complacent
- There's a 20% chance that Trump will win
- If Trump wins there could easily be a double shock to the system:
1) Hillary looks to be priced-in and so there could be a rapid unwinding of many positions
2) The markets then also have to react to Trump actually being President and the unknowns which that scenario brings
Double Trouble For the Markets if Trump Wins
At the moment, it looks like Hillary Clinton is firmly priced-in to be the next President and that might be a reasonable assumption.
However, the markets appear to be far too complacent with regards to the risk of Donald Trump becoming President.
In fact, during the whole campaign the markets have been unfazed by the Republican.
While the US dollar did strengthen after Clinton had a solid first Presidential TV debate there hasn't been a great deal of movement.
Looking back at the nominations, the markets didn't bat an eyelid as Trump worked his way through the other Republican contenders.
Two Key Short-Term Trading Problems with a Trump Win
The markets view a Hillary win as the best result. Therefore many investors will have two immediate problems if the Trumps get the keys to 1600 Pennsylvania Avenue.
Firstly, with Hillary looking to be firmly priced-in, a Trump win would mean that many positions are going to be quickly unwound.
There could be some quick selling of the dollar, Dow Jones, S&P 500 and NASDAQ as investors get out of, or even reverse, their positions.
Secondly, investors also have to react to what the new Presidency actually means. Trying to gauge a Trump Presidency is like looking into an opaque crystal ball.
Given that the markets can be skittish and short-term-ist at the best of times they won't like this high level of uncertainty. The selling could be somewhere between brisk and panic.
Not All One Way Traffic
Of course, because the markets can be rather short-term-ist, even if Trump wins, it's unlikely he'll be able to do too much damage in the immediate-term.
Therefore, even if the markets sell off, and depending upon his 'winning' rhetoric, it's easy to see the markets make a significant recovery within one or two weeks of the election.
The Bookmakers and Polls Do Get it Wrong
There are certainly trading opportunities coming up but investors need to think about the risks, particularly if the markets take flight.
Anyone long of the dollar or US stocks should be very careful. There is a genuine risk of a rapid sell off.
Again, it looks like we'll have another Clinton in the White House but Trump is not dead and buried.
The bookies have him at 5/1 and that's a tempting price in a two horse race.
It's a particularly large price when Trump is only 3-6% behind in most of the polls and the same polls often show 5-10% of voters are still undecided.
Also, we should not forget that UK referendum was a similarly close and contentious two horse race.
On 23 June the bookmarkers offered up to 9/1 on the UK to vote for Brexit. Anyone putting £10 on Brexit would have won £90, and got their £10 back, when the UK voted to leave the EU.
As always, investors need to assess the risks and their downside before they trade.