As an historic political night played itself out, the markets expressed their opinions and initially moved sharply down. As we often say, it is a market truism that markets do not like uncertainty. Uncertainty makes it difficult for market participants to price market securities appropriately. So, as it became obvious during the night that candidate Trump had a path to becoming President-elect Trump, the markets sold off. At the extreme, Dow index futures were down over 800 points. As of this writing (4:00 am), the sentiment is still negative, but the market futures are indicating a decline of between one and two percent or two hundred to three hundred points. This reaction seems reasonable to us in the face of the unexpected election result.
While the longer-term impact of the administration change will play itself out over months and years, it still seems imprudent to attempt to make any changes to long-term portfolio allocations based on what has happened tonight. In fact, any such kneejerk reactions expose a long-term investor to getting whipsawed similar to what was seen in the wake of the Brexit vote reaction.
As investors, we always look to the fundamentals. Nothing that happened in the election results will have any immediate impact on the metrics that affect the market fundamentals – corporate earnings, employment, inflation, etc. Over time, the new administration’s policies may have their impact, but those effects will take months and years to present themselves.
Perhaps the most interesting aspect of the night’s results is the fact that Republicans maintained control of both the Senate and the House. Given the current partisan acrimony and dysfunction in DC, it is likely that whatever proposed policies come from the new Trump administration, they will likely be somewhat tempered by the more mainstream Congressional leadership. A more stable partnership between the executive and legislative branches of government may provide the markets a better sense of certainty with respect to government policy going forward.
As always, we remain confident that capitalism works and that free markets will continue to provide returns for investors over the long term. Nothing about the night’s results has changed that dynamic. We welcome your questions about these important issues.
Roger Ward is a Principal at TrueWealth, LLC, a wealth management firm located in Atlanta, GA. He has more than 25 years of experience helping clients simplify the complications that come with managing wealth. He can be reached at firstname.lastname@example.org or 404.487.0404.
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