At the outset, I cannot stress strongly enough that my intent with this article is not to make a political point. Regardless of political views or feelings about the election result, there’s a fascinating case study on stock market behavior here, and it is worth unpacking what happened purely from an investment perspective.
Leading up to the election, global stock markets clearly priced in a Clinton victory, but as Trump won key battleground states like Ohio, Florida and Pennsylvania, global stock and currency markets plunged. While the U.S. stock market was closed, the futures market was hemorrhaging. At one point, Dow Jones futures were down some 800 points. Pundits and experts were brought on the networks to help explain the selloff. The reason was really pretty simple. The market wasn’t expecting Trump to win, and now that his victory seemed imminent, there was uncertainty about what a Trump presidency would mean.
Like many of you, I watched the election results and market reaction late into the night. I remember going to bed thinking about how we might be able to take advantage of the selloff the following day. After all, you build wealth by buying when others are selling.
That is where it gets interesting.
The following morning, the Dow opened at 18,317, only 16 points (or 0.09%) below its previous close of 18,333. By the end of the day, the Dow closed at 18,589, up 256 points above the previous close. Any plans that investors, myself included, had the night of the election that they would somehow take advantage of the dip had been eliminated by the time the market opened.
Now maybe I’m just a colossal geek, but I find that to be fascinating. The market was rocked by the uncertainty associated with an unanticipated Trump victory, but by the time you or I could do anything about this news, the market had taken that opportunity away. If this isn’t proof positive that you cannot outwit the stock market, I really don’t know what is. That’s Lesson #1. The collective ability of all investors (the market) to distill the news and arrive at a new projection about the future prospects of corporate earnings is light years ahead of our individual ability to do the same thing.
Lesson #2 is that our political views tend to shape our investment approach, at times to our great detriment. Roughly half of the investing public was unhappy, even distraught, with the results of the election. This led some investors to either sell stocks or to continue holding cash which really should have been invested for longer-term growth. But the market is politically agnostic. After the election, global stock markets have gone on to record-breaking highs. Investors who allowed political frustrations to get in the way of longer-term goals missed the first leg of an historic bull run.
And that leads us to Lesson #3. Investors who have been “waiting to get back in” find that the merry-go-round is spinning too fast. I spoke with three people (none of them clients) during the week after the election who told me that they would have made buys if the markets had remained depressed as they were the night of the election. However, after those losses had been erased overnight, they felt that it was “too late to get in” and that they “need to wait for another dip.” But as we know, the markets have been on a virtually uninterrupted increase since that night. In fact, only three times from November 4th to year-end has the Dow Jones Industrial Average seen back-to-back down days. If this rally continues, it makes it even harder for investors who are on the sidelines to take a long-term view.
No one knows what 2017 has in store for investors or what a Trump presidency will bring. However, we have an opportunity to learn from this election if we choose to, whether we’re pleased with its result or not.
Source: Wall Street Journal