Why chances of hitting election home-run trade are slim

Portfolio manager says predicting macro events and reaching the peak of 'payoff matrix' is hard

Why chances of hitting election home-run trade are slim

Think that now’s the time to make a killer U.S. election trade? Maybe you should think again.

While volatility and market whipsawing seems to invite portfolio changes or opportunistic moves, one portfolio manager said the odds of hitting a home run are slim.

Why? Well, while the noise coming from both political parties is increasingly loud and the debates around the issues often stimulating, big macro events are notoriously hard to predict and take advantage of.

David Barr, portfolio manager at PenderFund Capital, said: “In order to make ‘the greatest trade ever’ first you need to get the event right, and second get the trade right. On top of that, it needs to be massively contrarian or completely unknown for the payoff matrix to really hit it out of the park.”

Investors need only to look back on the 2016 election for examples of how events can produce the unexpected. The consensus was that Hilary Clinton would win. Didn’t happen. The consensus was also that if Trump won, the market would go down. Also didn’t happen, despite a dramatic drawdown in the after-hours market.

The message is: trading on these monumental macro events is hard. Where there are opportunities for the eager trader, however, is in the volatility that the election is likely to stir up. While the markets are forward-looking, there is no way of knowing for certain how great swathes of the American people will vote.

He said: “What we can focus on is the fact that markets don’t like uncertainty. In this case, the uncertainty of how the political landscape may shift on election date, or increased volatility on some to-be-determined date after the election. Markets dislike uncertainty, they hate surprises.

“While keeping our eye on the long term, we are gearing up so our funds can take advantage if volatility does rear its ugly head. Volatility is just like the ugly duckling, short term it’s ugly but in the long term the beauty of strong returns can emerge as an elegant swan.”