Donald Trump’s unexpected victory in yesterday’s US Presidential election has sparked extreme volatility in share markets around the world. Since most polls and observers had been predicting a Clinton victory, this outcome has introduced an element of fear and uncertainty for investors.
Based on the points below, our main advice to investors is to not panic. We do not believe this outcome should fundamentally change an investor’s medium to long-term investment strategy or asset allocation.
• The S&P 500 and ASX 200 declined 3%+ from October 1 thru November 7, on concerns that Trump might win. On the heels of Trump’s victory, the Dow Jones Industrial Average futures dropped almost 800 points overnight, but the index ended up gaining 1.4% on the day after the election. We view this as a clear indicator of high volatility ahead as markets digest the impact of Trump as President.
• In the event of a future market correction in the aftermath of the election result, such a market decline is typically not a good predictor of future market performance. Analysis from Schroders shows that after the S&P 500’s ten worst one-day declines, the S&P 500 has produced annual returns averaging 29% over the ensuing 12-month period, and 15% per annum over the ensuing 5-year period.
• In the two days after the Brexit result (23 June), the FTSE 200 traded down 5.6%. Since then, the FTSE 200 has risen over 15%, even whilst the implications of the Brexit result still remain somewhat unclear.
• The overall economic implications of Trump’s proposed policies are unknown at this point. It’s also unclear which policies are even likely to be implemented, and some may even prove to be beneficial for business conditions.
• The uncertainty of the impact of a Trump Presidency will likely cause near-term market volatility, including both sharp declines as well as rebounds. Trying to time when to exit and re-enter the markets has been shown to be not only extremely difficult, but also to result in sub-optimal investment returns.
• More often than not the initial market reaction after a Presidential election proves to be a poor indication of how it will perform over a full term. As per a recent Bloomberg article, the S&P 500 index swings an average 1.5 percent the day after a Presidential vote, though gains or losses over the first 24 hours predict the market’s direction 12 months later less than half the time.
• During periods of severe market turmoil, Six Park advises clients to avoid hasty, emotionally driven decisions to exit markets or tamper with well-crafted investment portfolios.
Six Park provides clients with diversified portfolios that include defensive investments such as bonds and cash yield assets to help mitigate the impact of volatility that is likely to exist in the market over the near term.