PFG News and Blog

Election Results and Market Implications

Bristling attacks, FBI investigations, hidden audio tapes, the Russians, and even a surprise ending involving a guy named Weiner. This is not a discarded manuscript for a poorly written spy novel, but rather a summation of how the modern-day popularity contest to choose the most powerful person on earth unfolded yesterday. The circus is over. Trump has won. What happens next?

The Trump win was unexpected and the investment markets are acting accordingly. Only once in the modern era has such an election surprise occurred. In 1948, Harry Truman was losing by what appeared to be an insurmountable lead only to hold up an infamously wrong newspaper headline. The stock market immediately dropped by 4% and was down by 10% before the end of the week. The markets were not enraged by the fact that Harry Truman won, but rather by the fact that an outcome occurred that they thought wasn’t a realistic possibility. Overnight markets have responded similarly to this modern-day election event because it came as such a surprise too. Markets always have and always will hate surprises.

Benefits of staying the course instead of politically driven investment decision making graph 

Beyond the surprise, markets also despise uncertainty and the path forward has become much more uncertain as it relates to health care, regulations, and international trade deals, amongst others. Some of these issues can be manipulated via executive orders directly by the President, but much will be caught in the gridlock that has come to dominate the political arena. Even though Republicans now control the Presidency, House of Representatives and the Senate for the first time in nearly 90 years, Democrats will still be able to block most decisions.

Thus, the names may have changed, but the gridlock remains the same. Over time, government gridlock has generally been viewed positively by the stock market, as the less that gets accomplished, the less regulation and the less government spending result. However, that conventional wisdom has become challenged in recent years because government gridlock—which has always ebbed and flowed over time— has gotten much worse, suggesting a high level of dysfunction among the leaders of this country. As toxic as the current political environment is in Washington, a filibuster proof 60% super-majority in the Senate is required to see any major initiatives pass in the halls of Congress; and this is not currently the case.

The U.S. election will, as always, give us sufficient reasons for both optimism and despair. But as investors, whether our preferred outcome materialized or not, we must keep our focus on where economic value is being created under the circumstances that actually occur, not on what would have happened had our choice been realized.

So who really won and lost with yesterday’s election? As always, diversified and long-term investors will win the day, while those focused on fear instead of fundamentals in their decision making process will lose. We’ve graphed it before but we need to graph it again to highlight the stark difference between investing based upon political tides, instead of maintaining course for the long-run regardless of Republican or Democratic White House occupation.

Let’s look at the underlying fundamentals of the economy that drive market returns over the long-term far more significantly than election results. GDP numbers were released for the 3rd quarter last Friday signaling an annualized growth rate of 2.9%. Companies are firing workers – a strong leading indicator for investment markets signaling corporate strength and confidence – at the lowest rate in 43 years. It would be historically unprecedented for the economy to dip in to a recession with these two data points trending positively.

Households and corporations are still being extremely cautious when it comes to spending. Bull markets don’t die from old age, but rather from euphoria leading to bubbles that eventually burst – such as real estate in 2008 and technology stocks in 2000. A wide swath of the American electorate woke up this morning thinking that the sky is falling because their candidate lost. This disappointment does not typically presage spending money like a drunken sailor. Caution will continue to rule supreme, which inturn will allow this plow-horse style of growth to continue to grind higher.

Events such as these do provide an opportunity to revisit your current investment allocations to determine if they are appropriate for your risk tolerance and time horizon – that is where we come in. Our strategies are designed to be “politically agnostic” with a diverse range of assets that all respond in a different manner to whatever market events manifest themselves. We are always available to discuss any details further that are specific to your circumstances.

Regardless of who won yesterday’s election, we all woke up this morning in an America that still represents the most dynamic economy in the world. That has not changed.

As always, thank you for your continued trust, confidence, and support in our investment process, longterm strategy and constant vigilance.

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