What a Difference a Day (or Two) Makes

Thursday, November 10, 2016

By: Christopher P. Cline

The Dow has increased by about 3% since the first of the month. It went up dramatically when it became clear that Clinton was going to win. It went up about the same amount when it became clear that Trump actually won. So much for predicting market moves.

So what lessons can we learn from politics and the market? First, the equities market likes stability more than about anything else, more than Democrats or Republicans (although historically the market DOES like Republicans more). Second, making investment decisions based on trends and projections isn't investing, it's gambling.

Let's take a closer look at those lessons. Despite the election FINALLY being over, there is much uncertainty left. The United States has deep divisions along class, education and racial lines, as the protests have shown. The economic policies of trade that have improved the economy as a whole could be overturned. President-Elect Trump's stated positions, many of which are fiscally dramatic, don't yet have the details behind them. More broadly, this election can be seen as a reflection of changes around the world: for example, an extension of Brexit, where a populist backlash against globalism and the "elites" won the day despite all predictions to the contrary. Similar movements are taking place in other countries. The Dow's surprising response is similar to that after Brexit: one month after the Brexit vote, on July 25 of this year the Wall Street Journal reported on the breathtaking market rebound in the month following that vote. Indeed, the US markets set several records at that time. This, following a dramatic drop in worldwide markets in the day or two following the event.

However, reacting to this uncertainty (which will probably cause a lot of market fluctuation) by getting out of those markets is probably little more than gambling. We may not see an interest rate rise for a while after this (or we may). We may see tax cuts, which lead to greater economic growth (or we may not). We may see a drop in the value of the dollar after protectionist policies are implemented (or we may not).

What we do know is that the United States still has the strongest economy in the world. We don't have the "economic engineering" problems of China, the negative interest rates issued by some governments in the developed world. A Republican President, working with a Republican Congress, could make changes to the economy that the markets will respond to. Just a reminder to always be ready to take the returns the market will give you; don't try to anticipate trends or outcomes or retreat in fear. Follow the evidence. Market timing has been proven time and again not to work; asset allocation does.

We're here to answer any questions you may have; please feel free to call Chris Cline at (360) 759-2478 or Maggie Traverso at (360) 759-2441.