The Underdog That Trumps All Underdogs

55272638 - 21 february 2016: republican presidential candidate donald trump speaks to several thousand supporters at a rally in atlanta, georgia.This year has brought its fair share of upsets. Lebron and his Cavs came back from being down 1-3 in the NBA finals, to bring the first championship to the organization. More recently, the Cubs overcame that same 1-3 deficit to win the World Series for the first time in over a century. But last week’s events have trumped both of those events, both in shock value and lasting effect.
It’s safe to assume that in the days before the election, Trump’s chances were slight, slighter than both the Cavs’ chances and the Cubs’ in most folks’ eyes. And while epic comebacks and unlikely victories are a fan favorite in the sports world, when it comes to political races, they often cause market volatility.
Whether you were rooting for the underdog or not on election night, you were likely not happy to watch that as Trump’s electoral count went up, international markets and domestic stock market futures went down. This is expected, when the unexpected occurs. Let me explain.
The volatility we saw on election night was less about Trump and more about the unlikeliness of his victory just hours prior. Nearly every election comes with market movement. The Bespoke Investment Group recently found that, going back to 1928, the S&P 500 has averaged a decline of 1 percent in the week after Election Day. During that time, when we have seen positive movement following an election, often it has happened when a sitting president won a second term, whether that incumbent was a Democrat or Republican. Why? Because people knew what to expect.
For the same reason, historically, when markets have gone down after an election, that drop has been less significant when the same party maintains the presidency, even when a new president is elected. The perception is that there will be a better sense of continuity, and investors have a better idea of what the world will look like moving forward.
With this election, not only did we have a new president and a new party take the presidency, we had Trump become president-elect . . .
The market response to a Trump presidency was probably more volatile than it would have been to a Hillary win. Hillary’s policies and her decision-making are considered to be more predictable, while Trump, as of now, is a bit of a wild card. He does not follow general party consensus, often seeming as much an Independent as a Republican, leaning hard against free trade but advocating for tax cuts and deregulation. This creates additional uncertainty, which means additional volatility.
By the time you finally went to bed on election night, the downward slide in futures could have caused some nightmares. But with a somewhat uneventful and inclusive acceptance speech from Trump, they started moving back up, almost to even, by the time you woke up.
The lesson here is that market reaction to current events can be dramatic, and fickle, and that highlights the importance of having a long-term investment strategy.
Much will be written over the next several weeks and months about domestic and global implications of a Trump presidency surrounding trade, immigration, foreign relations, fiscal policy, social issues and monetary policy. The fact is that the trajectory in all of these areas will unfold over the course of months and years but as of today, no specifics have been articulated by the president-elect: therefore they will take time to take shape.
Look, our country’s forefathers were smart. They built it around a system of checks and balances. This system is designed so that policy changes become less dramatic than whatever is said on the campaign trail. Two areas that any president does have more control over to make changes are within trade policy and foreign relations. And based upon campaign promises from President-Elect Donald Trump, these are the two areas of significant concern. But it will take time for these areas to take shape under our current system of legislation. However, Trump’s domestic economic agenda on the tax and regulatory front are seen as market positives, and an increased fiscal spend also would be a beacon of light helping to boost our current low-growth economy.
Election night brought a lot of emotion from both sides. You could see it on the faces of supporters at watch parties; you could hear it in the voices of news correspondents; and you likely could feel it in your own homes. But I want to remind you that there is no room for emotions in a sound financial plan. Let the markets go up, let them go down, and let them settle. Do not make a decision in a panic and find yourself running scared into a loss.
Trust your plan, trust your process, and trust that your financial strategy will make your portfolio outlook great again.
Now, more than ever, is the time to be vigilant and to stay alert. You do deserve more.
1. http://tinyurl.com/ovhozub.