U.S. Presidential Election Update
John Fischer, CFA®, CFP® | Chief Investment Officer
In a result that many thought was an improbable outcome as recent as yesterday, Donald Trump has been nominated as the next president of the United States. The markets responded initially with a similar surprise to the news as U.S. stock futures were down as much as 5% in the early morning hours as it became evident Mr. Trump would be victorious. They have since recovered those losses following Mr. Trump’s conciliatory acceptance speech with both the Dow and S&P 500 indices opening trading near yesterday’s close. Safe haven assets, such as gold and the Japanese yen, also spiked higher on the election news but are off their highs in early trading. The market’s resiliency suggests investors may have learned some valuable lessons from the panic selling that took place following the surprising outcome of the Brexit vote in late June.
Heading into election day, many believed a victory by Hillary Clinton was merely a formality. Polls had suggested that while her lead had narrowed in the week leading up to the election that she still maintained an adequate margin over Mr. Trump. Respected websites tasked with predicting the outcome of the presidential election put the odds of Mrs. Clinton winning as high as 80%. The market reflected this confidence in a Clinton victory as equity markets soared earlier this week on the news that the FBI would not pursue any additional charges in their most recent review of her email debacle.
If investors have learned anything from the surprise outcome of the Brexit vote this summer, it would be to avoid making emotional, rash decisions with regard to their investment portfolio on the heels of a political vote. In the two days following the unexpected result of the Brexit vote, the S&P 500 fell by more than 5% sending investors racing for the exit as the uncertainty of the election outcome loomed large. A mere three days later, the S&P 500 had surprisingly recovered its heavy losses to pull within 1% of its pre-Brexit levels.
While there is still much to be decided about the ultimate outcome of Britain’s decision to leave the European Union, thus far the economic numbers suggest that the fear was greater than reality. While no two elections are exactly alike, the aftermath of the Brexit vote serves as a reminder to all investors that panic is never a wise investment strategy.
As Mr. Trump prepares to enter the White House, there is much uncertainty surrounding both his foreign and domestic policies, which was evident in the market’s initial response to his victory last night. Like the outcome of the Brexit vote, we will not know the effects of Mr. Trump’s policies for quite some time.
While the Republican party now controls both the Senate and the House of Representatives, Mr. Trump’s path to implementing his policies is far from clear. He will be forced to negotiate with some of the established Republicans that rejected his campaign.
In the short-term, there is the potential that the Federal Reserve will decide to keep interest rates the same at their December meeting in light of the market uncertainty from the surprising election results. In an indication that the market is digesting the implications of a Trump presidency, bonds are actually negative this morning despite the market volatility. Usually, bonds outperform during market uncertainty as they are considered a safe haven asset. In this case, interest rates are rising on the long end of the yield curve as investors brace for the potential of higher rates due to Mr. Trump’s promises to increase infrastructure spending and cut income taxes, which could further increase the deficit.
While investors are often tempted to suggest that this market event is different, it’s important to put the results of the election into historical context. While presidential elections have proven to increase short- term market volatility, the long-term effect on market returns based on which party wins the election and control of Congress has been negligible. Over the long-term, market fundamentals such as earnings growth, valuations, and interest rates are much more predictive of market returns. As such, we would advise clients to ignore the short-term market noise, focus on their long-term portfolio objectives, and look for opportunities should the market uncertainty provide it.