Markets Don't Like Surprises

With the U.S. presidential election upsetting pre-election odds, markets are showing outsized moves. Assuming early-morning market indications hold, this will likely mark the largest gap following an election since the inception of the futures market, which is not a high hurdle:

Forgetting the election, Wednesday is also on track to be one of the largest gap down openings in the history of the futures. As we discussed in June, such massive dislocations at the opening of trading tend to lead to short-term volatility but with a highly positive skew over the next 4 days, measuring from the opening of the gap down.

Perhaps the only true comparison to this event, however, is the 1948 election when Truman won against the prediction of virtually every pre-election poll. Markets did not respond well to the surprise, fell more than 11% over the next month, and continued to decline for the next six months, ultimately losing nearly 20% in the S&P 500.

Markets don't like surprises, and expensive markets hate them. Tuesday's presumed results are a true outlier, and we're likely not going to be able to rely much on standard market stats for the time being. A better guide is probably the '48 election. Stepping in and buying into a large gap down open may work like usual, but this is not a "normal" market movement and seems more subject to failure than usual.