Just as the world expected Britain to vote to remain in the European Union earlier this year, the unexpected may have happened again. As of this writing, it appears as though Donald Trump may have pulled off the unexpected.
As written earlier this week, the stock market tends to react negatively to uncertainty and more mildly when the expected occurs, as the market trades in anticipation of events. With traders having largely priced in a Clinton presidential victory, as the odds increased for a Trump presidency, the US stock market futures fell sharply in the overnight hours, hitting their downside limit of 5%.
The last time we saw such violent overnight moves in the futures markets was when the unexpected last occurred. Britain voted to exit the EU, and markets reacted to the downside for fear of the unknown to come. We wrote at that time, “It’s important to keep in mind that initial stock market moves in response to events such as this are generally knee jerk reactions that are overdone.”
While our portfolios are customized for each client’s needs, we generally construct portfolios that are well diversified with a balanced approach that offers downside protection in addition to upside opportunity. We also generally hold liquidity to cover anticipated cash needs to avoid having to sell in a panicked downturn such as that which we may experience at Wednesday’s open.
As we’ve stated many times, we cannot predict the timing of moves the market might experience. However, we’re confident that regardless of the occupant in the White House, US companies will be able to adapt and succeed in various policy environments as they have throughout history.
While many Americans clearly voted for Trump, we believe many who punched his name on the ballot were voting against politics as usual. As with the British vote to exit the EU, there seems a sense of people having grown tired of politicians insulated from the real world setting policies that don’t seem to be working for ordinary people. This is a vote against the establishment.
There’s also a perspective that the economy has seen sluggish growth during President Obama’s tenure, with much of working class America feeling left behind. Trump ran on a platform that focused quite squarely on the promise of an improved economy and helping Americans who are suffering financially. If it turns out that he is, indeed, our next President, the trick will be figuring out how to deliver on such a promise.
A Nod To The Future
As for the stock market, once again, nobody can predict the direction of the market, when it will go up, when it will go down, when the top or bottom has been hit… not even the smarty pants big wigs on Wall Street. While there may be an anxious reaction to the downside in response to unexpected news, it’s important to recognize that throughout history, the market has rebounded to new highs time after time. Unless your financial goals have changed, making a drastic change to your portfolio would likely be imprudent. Even if a Trump presidency is frightening to you and the markets experience near-term upheaval, we hold a long-view of the market and remain confident that a bet against the US economy, as well as the checks and balances inherent to the US government, would prove a poor one.
And remember, we will never know what would have happened were the election results different. Sticking to the fundamentals and one’s discipline is the best course of action for an investor, especially under extraordinary and unlikely circumstances like this.
We are more than happy to talk with you about your allocation and whether it remains appropriate given your situation and financial circumstances. We know volatile times can cause anxiety, and we’re here to serve as a resource for you.
We recognize this has been a very emotional electoral cycle with strong feelings on both sides. We sincerely hope that with the election behind us, regardless of the outcome, we can begin to come together and heal as a country. That starts with We The People.
God Bless America.
UPDATE 6:47am PDT
While market futures experienced a big selloff overnight, the Dow opened only slightly lower and quickly moved into positive territory with calm on the trading floor. Given such a potentially emotion filled event, it’s nice to see some seemingly rational trading behavior where one could have seen panic. We’ll see how the day finishes, but at the moment, it’s nice to see the market communicating that life will go on.
UPDATE 2:21pm PDT
The US stock market came around during the day, seemingly in recognition that there will likely be opportunities in the marketplace under a Trump administration. The Dow closed up nearly 257 points. As uncertainty remains, and will remain for weeks, if not months surrounding what we might see from a Trump administration, we encourage investors to buckle their seat belts, as we could be in for a bit of a whipsaw. That said, we repeat our confidence in the ability of companies to adapt and succeed in whatever environment in which we find ourselves.