I can’t even get my head around the idea of Donald Trump as my president.
In a recent email to our investment clients, I had noted that Hillary Clinton appeared to be the clear favorite of the markets, and that markets were expecting her to win. I suggested that a Trump win would result in a selloff in markets, as investors have to adjust their thinking. I also suggested that is history were to be our guide, such a reaction, even if severe, would likely be brief.
Elections can result in some violent market volatility, but it tends to be short lived. Markets quickly seem to reach the same conclusion after every election – one man in office isn’t going to change the world on his or her own.
Now, I admit that Trump is a completely different kind of candidate. And it also appears he has a Republican Congress to work with. Markets overnight reacted violently and negatively to the news that Trump was winning. But some amount of calm seems to be returning to the markets even before they open. Futures trading as well as shares in overseas markets had recovered nicely leading up to the open. Markets are still down quite a bit as I write this, but far less than later last night.
Markets now appear to be looking past the shocking idea of the character of the Donald and starting to consider policy positions. Some will be judged very positively by markets. In particular, cuts to corporate tax rates, and schemes to offer incentives to companies to return dollars from overseas ventures back to the U.S. will likely be seen by markets as hugely positive. On the other hand, the market is terrified of Trump’s antagonistic rhetoric regarding world trade. If he creates a trade war with the rest of the world, we can be in deep economic trouble. We also have to remember that even a Republican Congress is not exactly a big fan of Trump. They are not going to be giving him a blank policy check.
In any case, investors need to be prepared for a lot more volatility as the markets assimilate information. Who is this man – really. What is he really going to do? How is he going to act as president. What kind of cabinet is he going to assemble? How much of his anti trade rhetoric was just so much bluster? Until we all start to get a feel for all of this, markets will be reacting by bouncing up and down on the daily news.
Investors should not fear volatility itself. Daily or weekly bounces in markets do not impact long term returns. Investors need to be very patient as markets learn about President Trumps policy direction. Furthermore, such volatility can offer opportunity for investment growth.
I realize that many of our investment clients were vehemently anti-Trump. And I do understand that position. But be careful about taking judgment about the man and building an investment strategy out of that emotion. There were many investors who were convinced that Obama would be the end of the US free market economy in 2008. America survived. Those who sold off equities based on Obama’s election lived to regret the day. Likewise, we suspect that there are many wondering if they can continue to invest in Trumps America. It is a natural reaction, after all the rhetoric of the campaign, to think that your opponents victory will result in the end of the free world.
We recommend against acting on these emotions. Emotion is the worst enemy of investors. Remaining calm when others are panicking is crucial to long term investment success. We will watch, wait, and see. We already own funds which will use this volatility to their advantage, building defenses which will provide protection down the road in the event Trump is more disruptive than we hope. Meanwhile we wait to see who and what President Donald Trump will actually be. We ourselves are not his biggest fans – but we now hope and pray he will be more than we may expect, but less than we may fear. And as investors, we remain confident that the American economy will survive and thrive, regardless of the antics of the man in the oval office.