Predicting the Market – The Impact of Elections

I need to start with a confession, today’s article IS a bit of a “bait and switch” tactic. The title suggests that I am going to share with you some magical action that will allow you to increase your profits in the stock market. And, while that is SOMEWHAT true, it’s also a bit of a ruse because—wait for it—the appropriate action is NO ACTION!

Looking Back - Impact of the 2016 Election

Let’s go back two years to 2016 when President Trump was elected. Leading up to election day, everyone “knew” that he was NOT going to win. So, when the results started to come in, and it became apparent that he would win, the collective wisdom did a double take. And stock futures took a MASSIVE tumble. Market projections were down in the double-digit range. A blood bath was setting up for the next morning! That night, I went to bed early, as I figured I would need a good night’s sleep to deal with some interesting questions in the AM.

When I woke up the next morning, the pre-market indicators showed an UPTICK in all of the markets.

What can we learn from this? Two things.

1. The Market is Efficient.

First, we had a case of the “knowledge” being wrong. When this happens, there is almost always a downtick in the market. I believe that this is because the market is efficient and captures all available information. At the moment when new information arrives, uncertainty reigns for an instant. And, as humans, we respond negatively to this uncertainty.

However, information quickly becomes widely/fully available—more so than ever in today’s connected/technology focused world. The market then stabilizes—perhaps up, perhaps down. But information is now “out,” and efficiency returns. In the case of Trump’s election, this resulted in the collective wisdom deciding the situation was now more pro-business than it had been the previous day, and so the markets rose. The lesson here is that the market is efficient.

2. Even if We Know, We Cannot Predict.

Second, we can ascertain that even when we “know,” we do NOT “know.” At the instant when it became clear that Trump was going to win, the collective wisdom decided “bad for the markets.” The “collective” KNEW that the market was going to go down. It (the collective) was wrong. The lesson here is simple: even when we “KNOW” what is going to happen, we cannot necessarily predict what the market will do. Sure, there are pundits around that will tell you that they know. Amazingly these pundits are not leveraging their portfolios to the maximum and reaping financial gains from this wisdom (that’s sarcasm folks!).

So is This Bad News for Investors?

So, I’ve proposed that (i) knowledge will often be wrong and (ii) even when knowledge is right, we may not know what to do with it. That does not sound very encouraging for investors! To the contrary, I am going to play my broken record and go back to:

My Two Unshakable Beliefs

At the core of my investment philosophy are two unshakable beliefs:

• Twenty years from now the world’s population will be larger than it is now.
• Twenty years from now the world’s economy will be larger than it is now.

Based on these two beliefs, the only logical conclusion that follows is that the world’s equity markets will be larger/higher in value. The historical data has shown this to be true. I wrote these same words last week (prior to the election), and they are STILL (in my opinion) true.

Stay the Course

With the above in mind, the “action” that you need to take with your portfolio is NO ACTION! You need to stick with your Investment Policy Strategy (IPS) and stay the course. Whether the nation goes red or blue, my two unshakable beliefs guide me to sticking to my IPS through good times and bad.

Watch Out for Bad Advice.

The attached article goes into the specifics of market performance related to election results. Shockingly (not) the message is that, whether the outcome is red or blue, the market marches on. Don’t be a fool and let the pundits convince you that you NEED to act. That’s bad advice and can be very costly to your investments.

Thank you for sharing a bit of your time with me this Friday.

Would You Like More Support?

• Do you have a well-defined Investment Policy Strategy that is used to drive your investments in support of a comprehensive financial plan?

• If not, would you like to partner with someone who is used to helping people get through these struggles and (then, with confidence) implement portfolio strategies in a systematic manner while focusing on your desired outcomes?

If so, feel free to send us an email or give us a call. We’d love to have the opportunity to help you find a bit more peace of mind when it comes to investing.

Enjoy the read and remember, it’s NOT about the money. It’s about how the money supports your goals!

Photo credit: Renan Kamikoga on unsplash.com