Here are a few observations on how the surprising vote could filter into Wall Street:
— For as shocking as the result is to markets, this is not a systemically threatening event. Eight years after the financial crisis rocked the core structures of the global financial system, this is worth keeping in mind.
U.S. banks are stable and market moves are so far well within the range of manageable gyrations. Investors are just collectively handicapping the implications for economic policy, interest rates and confidence among businesses and consumers. This is what markets do, only now they're doing so with a wider band of potential policy outcomes.
— The Brexit muscle memory will probably be strong. Markets were acting much as they did ahead of the Brexit vote, despite the fact that traders had witnessed that result only a few months ago. Heavy purchasing of downside protection in the preceding weeks, an anticipatory rally when the consensus establishment result was anticipated, then a sudden upending of the assumed probabilities leading to a reflex sell-off.
Interesting that equity futures have narrowed their overnight losses, which shows the popular tactical response is to buy this dip — which was the winning approach two days after Brexit.
Are investors jumping the gun on this?
An American presidency with questions about the country's economic relationship with the world is not quite the same as the U.K. undertaking a two-year process of redrawing its trade links with Europe. U.S. stocks lost some 6 percent in two days after Brexit, and here we're not even on track to give up the past two days' rally.
Many strategists are suggesting this market break is one to be bought, if only for a trade. The fact that investors were defensively positioned, with above-average cash holdings and lots of hedges on the books, could buffer this sell-off. Let's see if any real buying emerges after a bounce. Maybe the way this event will diverge from the Brexit script is it might not give such as good an entry point for a comeback trade.
— Global investors will probably pull back from U.S. assets, to the extent they can shift assets elsewhere. The United States market has never been one where an investor needed to factor in significant "political risk."
This has changed, at least in terms of perception. Professional investors and large-company CEOs are globalists and free traders, by orientation and vocation. This rupture in their world view by the largest country and capitalist beacon will at least raise doubts about whether a more structural repricing of global trade and capital flows will be necessary. Still, though, the market seems to be withholding judgment on just how much practically will change along these lines.
— The market was getting into gear for a possible upside run before this shock. Stocks had become oversold, sentiment was sour, cyclical sectors were moving to the fore, earnings were turning higher and investors were gaining comfort with a Fed rate hike followed by a pause. This process was definitely interrupted and the market will need to adjust along all those fronts.
Keith Lerner of SunTrust notes that there have been 15 substantial pullbacks since this bull market began in 2009, averaging 9.1 percent. This dip right now doesn't appear on track to getting that far, but Lerner notes that each break was surrounded by "uncertainty, angst and bad news."
The core issue as to whether this drop represents a good entry point for stocks: Whether recession risk has climbed appreciably. If the U.S. economy doesn't suffer a "confidence shock" or sharp business cutbacks, then a market drop would probably be relatively short-lived, but a correction could go pretty deep given full valuations and the fact that the market traded more than 10 percent lower just nine months ago. Traders often say that levels hit in overnight gaps in index futures usually are revisited. That would imply some room for a deeper probe, if it holds true.
— Treasurys are fascinating. The classic "rush to safety" drop in yields was fleeting. They are trading now as if higher deficits and a Fed on hold could let inflation run a bit hotter, steepening the yield curve. If this sell-off in Treasurys gathers pace, the rest of the credit markets could have a rough adjustment.
Economic optimists and bank investors wanted a steeper yield curve; it seems we have one — at least in the early going.
— It's a longer-term issue, but this is another brutal comeuppance for high-stakes data modeling — something that most of the investment profession relies on every day. While democratic balloting is not investors' stock in trade, the failure of the polling and data analytics community twice in rapid succession must unnerve investors who feel that markets can be neatly handicapped through big data and fancy simulations.