By Craig Fehr, CFA, Edward Jones
Special to the Financial Independence Hub
Global stocks initially reacted negatively on Wednesday in response to Donald Trump’s U.S. presidential election victory, reflecting the fact that the outcome differed from the consensus expectation, as well as the greater degree of policy uncertainty associated with Trump.
The result does come with unknowns, but remember, the market is rarely free of political uncertainties. The broader path for investment conditions will, in our view, be driven by fundamental trends that are still reasonably favourable and unlikely to change abruptly based simply on the election. So while the markets are reacting immediately and in volatile fashion, it’s important to consider the longer-term outlook when it comes to your investments.
Initial volatility doesn’t tell whole story
Wednesday’s initial knee-jerk reaction in the market was not because Trump is necessarily negative for stocks over time. Instead, it reflects the fact the market was surprised by the outcome (and the market rarely likes surprises) and because he represents a greater degree of policy uncertainty, particularly in areas such as trade and government spending.
In other words, the immediate reaction in the market should not be interpreted as a new negative direction for investment performance but instead a reaction to increased uncertainty.
While it’s easy to get distracted by the sensational election and ensuing headlines, perspective is important. Since 1944, the stock market has declined 66% of the time on the day after a presidential election. More often than not, the market was higher six months later, and importantly, two years after the election, the market had risen by an average of 12.2%.* [Source: *Bloomberg, Edward Jones Calculations. Past performance of the markets is not a guarantee of what will happen in the future.]
It’s worth remembering that the reaction to Brexit was severe but short term. As the dust settled, markets began to shift back toward larger global trends, which in our view remain fairly supportive.
• Domestic economic growth has been slow but is expected to remain positive. Growth in the U.S. has gained a bit of footing, supported by a healthier labour market.
• Global growth has stabilized and should benefit from increased policy stimulus in many large markets.
• Corporate profits are improving, helped by stabilizing oil prices and a steadier U.S. dollar.
• Interest rates remain relatively low, lowering borrowing costs for consumers and businesses.
Don’t put term limits on your investments
Politics provide plenty of headlines for investors to sift through. Campaign promises won’t become law overnight nor will they all be fulfilled. We believe a diversified portfolio and a longer-term perspective can put you in a better position to view short-term pullbacks as an opportunity. Consider the following:
• Don’t act simply because of the election. While it might be tempting, avoid the urge to make changes to your strategy or your portfolio because of the election. Your goals and your comfort with risk, not the party in office, should serve as the guidepost.
• Diversification for the broader investment landscape. Global investment conditions are fairly balanced with risks and opportunities. We think investment leadership will shift and rotate, favouring well-diversified portfolios.
• Look for opportunities. We could see additional volatility ahead, not only from the election, but also from central bank policy changes, commodity fluctuations and global imbalances. We think this represents an opportunity to add quality investments at attractive prices.
Craig Fehr, CFA, is an investment strategist with Edward Jones, and responsible for analyzing and interpreting economic trends and market conditions, as well as developing and recommending appropriate investment strategies to help clients build and maintain portfolios designed to help reach their long-term financial goals.