The election results are in: Donald Trump has been elected the 45th president of the United States. The Republicans have also maintained control over both the House and Senate. Over the past several months, we have had, by any measure, an acrimonious battle between the two candidates. Elections tend to engender strong emotions in people because they stir up strongly held personal beliefs, values and views on a wide array of social and economic issues. This election has been no exception, and the rhetoric from both sides has been fierce.
In addition to the rhetoric from politicians, you have probably also heard financial pundits and analysts offering their views on which candidate will be better for the stock market. The financial markets don’t like uncertainty, and indeed as the race tightened over the past few weeks, we saw some market volatility. As Trump’s victory became apparent state by state, the Dow futures dropped more than 800 points, and S&P 500 futures indicated a 5%-plus drop at the open.
Perhaps some hedge funds and other speculators were caught in the wrong positions by the surprising developments and had to sell things quickly and adjust to the new reality. Whatever it was, it ended quickly and markets recovered. By the end of the day Wednesday, U.S. equities closed up over 1% across the board. Talk about fast and unpredictable; we are glad we were not trying to trade in that market.
One change that may well stick is to interest rates. The 10-year Treasury yield, which has languished at historic lows well below 2% for an extended period, quickly blew through the 2% barrier and stayed there. Perhaps the expectation of policy changes like reduced corporate taxes and regulations, potentially leading to faster economic growth and wage pressure, caused traders to expect more Fed tightening and maybe even a little inflation. Maybe…stay tuned.
It may be a rough ride these next few days and weeks as the market adjusts. It’s hard, but now is the time to stick to your guns and keep your well-diversified portfolio. Why do we say that? Well, as advisors, it is our job to help separate the emotions of the moment from our clients' interests as long-term investors.
Now is the time to stick to your guns and keep your well-diversified portfolio.
Looking back at market performance in various presidential regimes, we see that returns in the U.S. have been positive over time, regardless of which major party was in power. And as we saw on Tuesday, things can change rapidly.
Markets Have Rewarded Long-Term Investors Under a Variety of Presidents
Growth of a Dollar Invested in the S&P 500: January 1926–June 2016
Source: Dimensional Fund Advisors, 2016. Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor’s Index Services Group.
This doesn’t mean that our choice of president is irrelevant — but it is important to remember that there are forces at work outside of an administration that can influence the markets either positively or negatively. A few examples of such “wildcards” from the recent past include the Gulf War in the 1980s, technological advances that heralded the internet boom in the 1990s and the global financial crisis of 2008. Each of these events had a profound impact on the investment climate during the regime of a president, but was not even a consideration at the time of election.
Let’s Take a Step Back
Remember, the U.S. stock market is made up of thousands of companies that operate in various sectors, from technology to consumer goods to energy. Each of these companies is working toward making a profit for their shareholders. Ultimately, in aggregate, these companies have found ways to continue growing, making profits and building wealth for their shareholders over the years. Whatever policies are in place at any point in time, companies manage to adjust; our belief is that they will continue to do so.
Interested in learning more? Here’s an insightful white paper exploring market performance in past presidential elections.