It’s a rare occasion when nearly everyone in the financial industry agrees about something. Take any question you can think of…
When will the next big bear market be upon us?
How big will the next downturn be?
When will the Fed finally raise interest rates?
Which sectors are currently overvalued and which are still a good buy?
You’ll never get a consensus on any questions like that. But leading up to the election, we had a consensus: If Trump somehow pulls out a victory, the market isn’t going to like it. Stocks will crash, bonds will rally, people will be moving to cash. It will be a classic panic reaction.
Whoops.
Around midnight on election night, when a Trump victory was starting to seem like the most likely scenario, the Dow Jones and S&P futures were a bloodbath. It looked like the night of the Brexit vote, but this time on steroids.
In case you’ve forgotten, the Brexit fallout went something like this. It becomes pretty clear between 9-10pm ET on a Thursday evening that the UK is going to vote to leave the European Union. The markets don’t like the economic uncertainty that this could portend, so all of the futures start tanking. When the market opens on Friday morning, everything is down. Way down.
But then cooler heads start to prevail. People realize it’s not the end of the world. The market starts to rally. By closing time on Friday, it’s as if nothing ever happened. We’re right back where we were at closing time on Thursday afternoon, before they started counting votes in the UK. The only people who got hurt were the people who panicked on Friday morning and sold everything before the recovery. And the people who were buyers on Friday morning (while the rest of the world was panicking), well…they had a good day.
It’s like Warren Buffett says, “Be fearful when others are greedy and greedy when others are fearful.”
So on election night, it seemed like we were setting up for a nearly identical pattern. Futures are down overnight, so the market will be way down at open, then bounce back. Unlikely that this recovery happens in a single day like it did after Brexit, but it shouldn’t be a prolonged downturn.
But then the markets open on Wednesday morning after the election and stocks are….up? And they kept going up. A day later, on Thursday, we hit a new all-time high in the market. So what exactly happened?
A lot of it probably stems from Trump’s victory speech. He talked about focusing on rebuilding our infrastructure—things like highways, bridges, tunnels, and airports. While it’s debatable as to whether or not this is much of a boon to the economy overall, it definitely would help the profits of several major companies. So the market liked that.
At the same time, his speech avoided all of the topics that the market wouldn’t like so much. He didn’t mention starting a trade war with China (which would hurt our auto industry and high-profile technology companies like Apple), and he didn’t mention mass deportation (which would hurt the agricultural industry and service industries that rely on immigrant labor).
If that’s true—if an election night victory speech can cause the market to completely forget about the last 18 months of campaign rhetoric—that shows us just how fickle and unpredictable the market can be.
Which means that my message is the same as it’s always been.
If you’re retired or getting close to retirement, you simply can’t afford to have all of your money exposed to the whims of such a fickle mistress. If your stomach is in knots every time we have an event that creates volatility, that’s a good sign that you probably need to make some adjustments.
At the same time, if you’re not retiring for another couple of decades, you just don’t need to panic every time the market hiccups.
But perhaps the most important lesson from the market’s response to Trump’s victory is this—when the financial world reaches a consensus on something…be wary.