Election surprises happen. This election result was a surprise, yet uncertainty was disclosed in many polls prior to the election. Wishing for an outcome is not the same as discounting reality. This is the second time this year where populism through election victories has surprised markets. Handicappers will adjust to the new reality. The date of the potential surprise was know, the outcome was not.
A Black Swan? I don't
think so now that we are looking a few hours out from the event. As an event
that will rock the market, this met the case based on short-term flows but not
by longer-term measures at least with respect to stocks. The chart for Dec
S&P futures shows a huge intraday move, but now within some measures
of trend. Bond markets sold-off hard under huge volume. This is
the asset class to watch more closely.
Dec S&P futures
Dec Bond futures
Tail events will often lead to over-reaction as seen in the market action overnight. The worth of a manager is not measured by his ability to build and adjust portfolios in calm times but his ability to navigate and manage through uncertainty.
Navigating uncertainty is
not always taking action but at times learning to do nothing. Discussion with
managers suggests that some systematic managers did not take model signals last
night. Markets moves out of proportion to the discounted futures cash flows
signaled that no action was best.
Managing uncertainty starts with core portfolio construction.
Extra diversification is necessary when there is extra risk. Diversification
may come through differences in timeframe and styles when correlations across
asset classes have the likelihood of moving to one. Managers are paid
to build portfolios, manage risk, and take action on changes in economic
fundamentals, this cannot generally be done with passive investing.
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