2016 Election - The Morning After
Wednesday, November 9, 2016
Given that we used up all of our movie references and synonyms for surprise after the Brexit vote, let’s just go with a quote from a Boraxo salesman turned president, Ronald Reagan, who famously stated, ”there you go again.” Once again, voters have stunned pollsters and the markets with a protest vote, in this case electing Donald Trump as the 45th president of the United States.
What should I do with my portfolio? Quite simply, if your investment goals have not changed, your investment plan should not change. Yes, this is an admittedly boring and predictable response from us, but we believe the appropriate action. Volatility spikes on shocks, but eventually returns to normalcy once it has time to digest the events. A stock market drop of 5% happens frequently enough that it should be considered routine for our clients. Should markets fall further, clients with longer time-horizons should consider putting excess cash to work. In this scenario, we would look to pull forward any existing dollar-cost averaging plans we currently have established.
If you were watching last night’s election results, you no doubt saw the Dow futures tumble once it appeared Trump would take Florida. At their lowest point, Dow futures sunk by 867 points, but those losses were cut in half once Hillary Clinton conceded and eliminated the possibility of a contested election. As of market open, the Dow is actually slightly higher. This whipsaw in markets is eerily similar to the reaction to the Brexit vote in June. The market responded last night to the surprise in the results rather than an immediate repudiation of a Trump presidency. Markets hate uncertainty, and 80% Clinton victory odds were baked in the markets. The chart below highlighted in red what was the expected outcome, which was a Clinton victory and a split Congress. Historically, this blend of government had performed well for markets. Interestingly, the only blend of government that has topped it has been a GOP sweep of Washington, which is what happened last night.
Hyperbole is always the order of the day after elections, especially when more than half of voters opted for someone other than the winner. However, we are reminded of past elections, when similar prophets of doom said to sell.
• In 1980, it was our Boraxo salesman, who many thought would just start firing nuclear missiles at Russia.
• In 1992, it was the guy from Arkansas whose wife was going to socialize medicine.
• In 2000, it was another guy who lost the popular vote, and stole Florida.
• In 2008, it was a community organizer with an agenda based on hope and change.
In all cases, our country survived, and the markets, though subject to the volatility inherent in investing, marched onward. In our June note on Brexit, we stated there was a possibility of a “burgeoning populist tide…electing upstart, anti-establishment parties.” Watching the election unfold last night, we couldn’t help but wonder how the polling experts all forgot that, quite simply, it’s the economy, stupid. We discussed the chart below in our summer newsletter and a variation of it in just a few weeks ago. When the economy slows, people get angry. That anger may manifest itself to a specific issue the voter focuses on, be it immigration, trade, taxes, regulation, but these tangents all seem to lead back to the root of low economic growth. The last time growth was this anemic for this long was the 1948 election, another whiff by polling experts. It should be noted while slow economic growth can stir political volatility, slow but still positive economic growth with low levels of inflation has been a rather favorable environment for equity investors historically.
Markets will trade on emotion for the next few days, and emotional investing almost always ends badly. We will be monitoring market volatility closely over the coming weeks heading into the December Fed meeting and will opportunistically invest if appropriate.
Please feel free to contact us if you would like to discuss further.
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