November 9, 2016 | by Scott Miller, Jr.
Please do not hesitate to pick up the phone and call or email a member of our team regarding the election results and how it affects your portfolio. We want to be sure that you are aware we are here to speak with you individually and address any inquiries you may have regarding your current investment strategy or portfolio. The 2016 election is now over and no matter who you supported, we hope that this marks the beginning of a cooling off period.
“Over the short-term, equity markets react based on emotions. Long-term, they act on economic fundamentals and corporate earnings.”
From an equity market view, last night was a fascinating series of events as stock futures plummeted over 5% which triggered market limit stops down for only the second time ever. The immediate reaction was reminiscent of the Brexit with a swift and steep decline. Like the Brexit, the initial reaction in the U.S. equity market was an emotional one. The futures market can be very volatile with emotional moves that are often exacerbated by program trading. By the time we had awaken, the futures had improved considerably. By 9:30 AM Eastern Time, when the market opened, equities were essentially flat. In other words, if someone last looked at market levels at 4 PM yesterday and not again until this morning’s open, it would have appeared as though nothing happened. However, as anyone who stayed up for results last night knows, the past 24 hours have been anything but boring. The rapid dissemination of information causes quick, dramatic moves in the stock market often based more on emotion than fundamentals or stock earnings. Like the Brexit vote, reacting to the news cycle rarely proves to be a sound long-term strategy. Take for instance a headline from Reuters early this morning reading, “Investors See No Let Up to Market Bloodbath if Trump Wins Presidency.” This is not to say that caution in the markets isn’t warranted. That is where we help. Partial downside protection has always been an important part of our strategy and is a large part of what we do for our clients to smooth out market extremes.
Let’s look at a historical context of immediate reactions to presidential elections and the recent Brexit vote, as the parallels are obvious. Please refer to the chart below.
Reacting to these events has not proven to be a successful long-term strategy in any of these cases. We would argue that if you are “Trump-hater,” a “Trump-lover” or fall somewhere in the middle, your best strategy is to take a long-term approach to investing.
Understandably, the potential positives and negatives for areas of the stock market and economy following this election. The positives being that Donald Trump’s policies appear to be an outlier to the Democratic and Republican agendas that have been in place. Mainstream appointments and a shift to more mainstream policy would likely be a positive. Donald Trump has never been afraid to spend or borrow money meaning that more fiscal stimulus may be coming and while we are uncertain of the long-term meaning of that, short-term it would be positive for the market. Deregulation would also be welcomed by business owners. Potential negatives for the markets include trade friction and foreign policy missteps Donald Trump could make. Any reduction in international trade would be a negative for global markets. If the appointments and policy-making are less mainstream and lack clarity, market movements could be more extreme. Finally, Trump campaigned against the Federal Reserve which could lead to monetary policy uncertainty.
The markets almost always react to these events emotionally over the short-term and will value based on earnings and future earnings trends over the long term. While we have discussed some positives and negatives above, no one truly knows what will happen as a result of this election outcome; not in the stock markets or its impact it on policy making and the country as a whole. As always, please do not hesitate to contact us with any questions you may have or to schedule a personal review of your portfolio.