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16 November 2016
Prior to the election earlier this month, many market commentators predicted that the market would crash if Donald Trump pulled off an upset victory. Of course, Trump won, and the market hasn't crashed; in fact, stocks have for the most part risen.
So how did the dire forecasts get it wrong? In my opinion, they underestimated the adaptability and strength of the capital markets. You and I may be thrilled or depressed, or something in between, by the election outcome. But markets have a history of chugging along, even in the face of jarring and unforeseen events.
Remember Brexit? After the U.K. voted in June to leave the European Union, the S&P 500 dropped about 5% over two trading days. Just a couple of weeks later, it had recovered and set new highs. This was no anomaly. In fact, the market has recovered in two weeks or less from a long list of unsettling events. They include the Cuban Missile Crisis, in 1962, JFK's Assassination, in 1963, and the shooting of President Reagan in 1981.
Other events took longer—the Pearl Harbor Attack, Nixon's resignation, the 9/11 terrorist attacks are examples—but in each case, the market recouped its losses in much less than a year. Today, information travels faster than ever thanks to the internet and modern communications technology. Market participants are able to quickly take the measure of an event, gather information, and respond appropriately.
In addition, market participants seem to be learning the lessons of history: Over-reacting to big events is pointless and even counterproductive, because markets always recover.
Many investors feel the need to do something dramatic based on the election results. That's not necessarily wise or necessary. Certainly, there may be specific opportunities as changes in policies, regulations and laws are put into place. But the economy and the markets operate largely independently of politics. A good, long-term portfolio is designed with the understanding that unexpected events are inevitable.
It's easy to get caught up in the market's daily price movements. But wise investors understand that there are only two prices that matter: The price at which an investment is bought, and the price at which it is sold. I'm recommending that my clients remain patient and take a long-term view, while staying alert as always for new opportunities.