Donald Trump beat Hillary Clinton in the Presidential election last week. It was clear from the get-go that the markets preferred Clinton to win over Trump – just look at how they reacted negatively every time Trump moved up in the polls, as well as their concern about a falling market on the day after the election. But the truth is, it isn’t that simple.
I would argue that the market didn’t like or dislike either candidate. What the market likes is certainty, because that provides the ability to approximate the future. The polls strongly favored Clinton, which gave the market confidence that there was a known outcome. That known outcome was priced into the market. When the polls showed even the slightest possibility of a different outcome – and then the results of the election bucked that outcome, the markets reacted to that uncertainty. Investor emotions drive the market.
So if your clients are feeling anxious about the President-elect and his impact on their portfolios, here’s what you can tell them.
Every human being has some kind of bias that skews their point of view. Investors are known for putting too much weight on events they believe will impact the market one way or another. The fact is, events don’t impact the market; the market is impacted by the reaction of investors to an event and in turn, how they believe that event will impact the market. (That may have just blown your mind!)
Individuals view issues differently, based on whether or not the governing party in place shares their beliefs. As an example, a Pew Research Center Report showed that under Presidents Obama and Bill Clinton, fewer than half of Democrats thought reducing the deficit was a top priority. But under George W. Bush, that number jumped to over two thirds. Republicans, as you would expect, had the exact opposite reaction.
It’s been scientifically proven that investors take more risk when their political party is in power. In the study Political Climate, Optimism, and Investment Decisions, it shows that investors believe risk will be lower and returns will be higher when their political party is in power. This misinterpretation of reality leads them to take more risk in their portfolios, ultimately putting their financial futures on the line.
Fallacies about the election
There are statistics out there suggesting that the market will act a certain way, based on having elected a Republican president. There is historical precedent, according to Sam Stovall, chief equity strategist at S&P Capital IQ, that a Republican president results in an average return of 6.70% on the S&P 500. That is lower, relative to the average return for a Democratic presidency at 9.70%.
But let’s remember – the stock market has performed the best historically when there has been a Republican president and Congress, which is the situation we will find ourselves in come January 2017.
And then there’s this: None of this information is really all that reliable, because the sample set is too small to be significantly, statistically relevant.
We’ll have a president for 4 years – 8 years, tops. When we compare that to the 40+ years our clients have to invest for retirement and the 30+ years they have to live off those savings through retirement, I think we can safely say that presidents may come and go, but portfolios are here to stay.
The Bloomberg article The Election Doesn’t Matter references a chart that shows, regardless of what political party is in charge, the impact on the stock market is so small, it doesn’t show up in over 160 years of returns. The lesson here? Remind your clients, no matter what candidate won or lost, they need to temper their emotions and stay the course in their investment portfolios.
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