Donald Trump on Tuesday was elected the 45th President of the United States, and the Republicans retained their majorities in the House and Senate. Further, the GOP now controls a majority of State Houses and Governorships, and will pick the Supreme Court replacement for Justice Antonin Scalia. All of this suggests that there could be a significant shift away from the status quo, and unsurprisingly the stock market’s kneejerk reaction was not favorable. Indeed, on election night S&P 500 futures started tanking as the odds of a Trump victory increased, with the front-month contract even trading limit down at one point and erasing all of its 2016-to-date gains in the process. However, futures recouped a lot of those losses following President-elect Trump’s encouraging victory speech, and major indices even managed to turn positive by the opening bell and finish the day with significant gains as investors considered the increased prospect of tax cuts and a pro-growth set of policies.
Volatility, though, could remain elevated in the near-term as the markets continue to digest what the next four years of potential policy changes will mean for the economy. This heightened uncertainty could result in additional sharp swings in stock valuations, both higher and lower, which is why retirement investors should stay focused on the long-term and remain nimble enough to take advantage of potential buying opportunities. Just look at 2008 when Barack Obama beat John McCain. Many investors at the time similarly feared that Obama’s victory would be a big departure from the status quo and the S&P 500 plummeted by roughly 5 percent the day after the polls closed. That loss was short-lived because twelve months later the benchmark index had rallied by more than 10 percent, and later went on to climb to new all-time highs. In fact, in the more than twenty Presidential elections that have occurred since 1928, the S&P 500 has fallen fifteen times the day after the vote, with an average loss of 1.8 percent, according to Bloomberg calculations. Stocks rebounded over the next twelve months in nine of those instances.
There are of course no guarantees that history will repeat itself with stocks continuing to perform well following this election but any investor with a reasonable time horizon should avoid panicking if they turn on the television and see that equities are tanking. Proper portfolio diversification across asset classes can help limit one’s sensitivity to a selloff in the stock market, and exposure to equities should be gradually reduced over time as one nears the age of retirement so that funds are shifted to traditionally “safer” investment vehicles like fixed income products and cash. Since all of this can be a convoluted and time-consuming process for retail investors to tackle on their own, the best option for many people will be to instead regularly work with a professional financial advisor who can simplify everything and make sure that a client’s investments remain aligned with the desired retirement outcome. As always, we are here to help with any questions you may have.
Sources: Wall Street Journal, Reuters, Bloomberg, Twitter, et al
Post author: Charles CouchDisclosures