Just like back on 23 June, we have woken up to an electoral outcome few commentators thought possible. Donald Trump has won one of the most acrimonious presidential elections battles in recent US history. He will become the most powerful man on the planet and the leader of the world’s largest economy. Asian stock markets have fallen by as much as 5% and European and US markets immediately headed in a similar direction. So given the much larger size and influence of the US in both political and economic terms do we have to brace ourselves for a bigger and longer lasting shock to capital markets than after the surprise of the Brexit referendum? You might be thinking that the outcome of the election will lead to some big shifts in our investment strategy, but it will not for the following reasons.
Current market prices are an up-to-the-minute snapshot of the aggregate expectations of market participants. What this means is that the millions of market participants around the world are acting (transacting) on their expectations about future returns. Buyers and sellers are exchanging opinions about future returns at the same time they are exchanging assets, and those opinions include views about the impact of the election. Unanticipated future events may lead to changes of opinion, but it is unlikely that investors can gain an edge by attempting to predict what effect the election will have on markets.
The market impact of presidential elections is smaller than you might think. In the US stock market since 1926, all the months during which presidential elections have been held fall well within the typical range of returns, regardless of which party won the election. And this chart illustrates that regardless of which party won, the US stock market has provided substantial returns.
This result is because the stock market is powered not only by decisions made by political leaders, but by a complex blend of (among other things) commerce, enterprise, risk, finance, hard work and innovation. Did you know, for example, that the number of US patents granted in the US since the 1960s has tripled? It is no wonder that markets thrive, regardless of political regimes, and will continue to efficiently allocate capital for innovation, progress and profit. It is reasonable to apply the same long-term thinking to other markets and other big macro events, such as Britain’s exit from the EU and leadership changes elsewhere in the region. We do not know what the outcome or effect of these events will be, but we do know that markets express aggregate expectations in prices and that long-term returns reward patient, disciplined investors.
Given President-elect Trump’s lack of governing experience and outsider status, his election will indeed mean far more uncertainty about the future direction of US policy than Hilary Clinton. Risk asset markets can’t stand uncertainty; hence why stock markets are falling. However, taking a step back and with the post Brexit vote experience behind us, a collapse of and lasting turmoil in global stock markets as a reaction to the election of Trump is not probable. It is far more likely that after the initial shock – predominantly on the side of foreign investors – markets will refocus on the likely realities a President Trump would face. Just as President Obama was quite limited in what he was able to achieve under the constraints of Washington’s administration apparatus, so will a President Trump.
The strengthening of the US economy which was further evidenced over the last week by improving corporate profitability, rising employment, better business sentiment readings and the central bank indicating a December rate rise, is highly likely to bring market emotions quickly back to a very different reality. One of persistent, steady economic growth, which so far has withstood so many headwinds over the past years that an over promising Donald Trump is unlikely to significantly derail it either – certainly in the short to medium term. Those who are fearful about the short term value development of their investment portfolios, should think back to all the doomsday market scenario predictions ahead of the Brexit referendum and take note that there was much less of this type of comment before this election.
In his acceptance speech this morning just before 08:00 hours, Donald Trump already changed his tone significantly from his trademark divisive style to a far more conciliatory one. He invited the whole nation to come together and unify to move the country forward with great tasks ahead, mentioning among other things the rebuilding of US infrastructure. Notably his more aggressive campaign statements of building walls and expatriating illegal immigrants were absent. Keep calm and carry on, is my advice in these interesting and sometimes disturbing times. The global economy is going strong and there is little reason to believe that the recent strength of the US economy will falter over the short term.
In terms of our management of client portfolios we will continue with our disciplined and level headed approach which takes its direction from the realities of the economy and corporate results, rather than short term emotions that drive the volatility of markets.