U.S. Election Surprise, BREXIT – Part II? 

“May you live in interesting times.”
Chinese proverb.

Similar to the morning after the Brexit referendum vote in the U.K., the United States and the rest of the world awoke to find that contrary to almost all of the polls and prognosticators, voters chose to elect Donald Trump as the next President of the United States.  Republicans also retained majorities in both the Senate and the House.

As the probability of a Trump victory began to become a real possibility, global markets reacted negatively in what could best be described as a knee-jerk global selloff in equities and a rally in “safe haven” assets.   However, the initial dramatic turbulence in financial markets began to calm beginning with Donald Trump’s early morning acceptance speech which seemed to strike a conciliatory tone.

After initial dramatic declines, futures on the S&P 500 Index and the U.S. dollar pared their initial losses ahead of the opening of the U.S. stock market.  The VIX volatility index and gold spiked dramatically during the overnight hours as well but they also came back from their early post-election surprise levels.  The yield on 10 year U.S. Treasuries declined overnight towards a risk-off posture, however this situation also reversed.  In fact, yields on 10 year U.S. Treasuries were higher by morning and the U.S. Treasury yield curve had actually steepened.

The surprise results of the U.S. presidential election looked like a carbon copy of the aftermath of the Brexit referendum, however there are important differences.  First, the British pound played a key role in initially cushioning the effect on the markets after the referendum vote in the U.K. Further, the timing of the actual implementation of Brexit is much further off on the horizon than the changing of the U.S. presidential administration which will begin to take shape almost immediately.

As with the Brexit vote earlier in the year, no one can predict precisely what lies ahead for the global capital markets as a result of Donald Trump’s surprising victory.  However, the 3EDGE investment team has been through many market dislocations over the years.  We construct and manage client portfolios with an eye towards the potential for “Black Swan” events, such as major electoral surprises, in advance.  We believe that this is a far more prudent approach to portfolio risk management than venturing to guess the potential market reactions to future events, or attempting to react to major market dislocations once they occur since by then it is often too late.

Our first line of defense from potential market dislocations is our broad portfolio diversification.  Although our current equity holdings could be negatively affected by any market downturn, our holdings in gold, short-term fixed income, as well as our cash position could help to offset declines in our equity holdings.  In the end, our long-term investment goal remains to generate positive returns while simultaneously managing portfolio risk particularly from potential global shocks such as the earlier Brexit vote and now the surprising result of the U.S. presidential election.

We will continue to closely monitor the markets going forward and are prepared to take action if we believe such a move makes sense.  We will also be paying close attention to the upcoming Italian referendum scheduled for early December, as well as the potential for an interest rate increase from the U.S. Federal Reserve in early December.  We have no qualms about taking risk off the table by raising additional cash if such a course of action becomes appropriate.  However, it is also true that oftentimes during periods of market dislocation the best course of action may be to not make too many changes to one’s investment portfolio.

DeFred G. Folts III
Chief Investment Strategist

DISCLAIMER: The opinions expressed in this Investor Letter are those of Fritz Folts of 3EDGE Asset Management, LP and are subject to change without notice in reaction to shifting market conditions. Mr. Folts’ opinions are not intended to provide personal investment advice and do not take into account the investment objectives and financial resources of the reader. Mr. Folts’ statements do not constitute an offer to buy or sell any security. Investments in securities, including common stocks, fixed income, commodities and ETFs, involve the risk of loss that investors should be prepared to bear. Past performance may not be indicative of future results.