The U.S. presidential election results are, at the very least, shocking to many of us. Following this upset in election results, we should anticipate significant volatility in financial markets. Why? Financial markets historically loathe uncertainty and, regardless of what one personally thinks of the winning candidate, everyone can agree that the American people and U.S. financial markets are quite uncertain about how his presidency will play out and what its impact may be on the economy.
At times like these, it’s important to remember that we’ve experienced extreme uncertainty in the past. Financial markets have taken a dip (at times a hair-raising one) and they have also subsequently recovered. The cry that “this time is different” was heard throughout the financial market turmoil surrounding both the terrorist attacks of September 11, 2001 and Great Recession of 2008-2009. In both cases, it was true – the specific events that brought on the market volatility were new and different. That is precisely why those events were able to have a substantial impact on financial markets – their novelty created a great deal of uncertainty. But, major market volatility resulting from a surprising set of circumstances was not new and neither were the subsequent recoveries. We can expect that an election upset as surprising as this one might have a similarly significant impact on financial markets.
Anxiety is a completely natural response to market volatility. Acting on those emotions, though, can end up doing us more harm than good. At times like these, usually the wisest thing to do is to stick with the investment strategy you’ve already established. A good investment plan assumes that there will be some dramatic ups and downs along the way.
Below are a few things to keep in mind as we observe the behavior of financial markets this week.
1. Market timing is hard.
If you were considering a change to your investment strategy in response to the election volatility, please bear in mind that market recoveries can come just as quickly and just as violently as the prior decline. For instance, in March 2009 (the bottom of the Great Recession), the S&P 500 turned and put in seven consecutive months of gains. A little over a year after the low, gains had totaled almost 80 percent. This is not to predict a similar trajectory this time, but it is a reminder of the dangers for long-term investors of turning paper losses into real ones and paying for the risk without waiting around for the recovery.
2. Nothing lasts forever.
Neither a presidency nor a market cycle is ever permanent. Just as smart investors temper their enthusiasm in booms, they keep a reserve of optimism during busts. And just as loading up on risk when prices are high can leave you exposed to a correction, dumping risk altogether when prices are low means you can miss the turn when it comes. As always in life, moderation is a good policy.
3. Someone is buying.
Quitting the equity market when it is down is like running away from a sale. When prices are discounted to reflect higher risk, that’s another way of saying expected returns are higher. And when the media headlines proclaim that “investors are dumping stocks”, remember someone is buying them. Those people are often the long-term investors.
4. Discipline and diversification are key.
Market volatility is worrisome, no doubt, and the feelings that come with it are completely understandable. But through discipline, diversification, and an understanding of how markets work, the ride can be made bearable. At some point, value will re-emerge, and for those who acknowledged their emotions without acting on them, relief will replace anxiety.