Donald Trump and the Stock Market
Will the election affect the stock market?
One of my clients asked me if we should be preparing for a Trump victory that causes the stock market to fall dramatically.
Not an easy question to answer but consider these points:
- Even with the recent pro-Trump surge, it still appears unlikely that he will win.
- If he does win, no one knows how the markets would react.
- Stock markets often anticipate events and prices rise or fall in advance of the news. The S&P 500 Index is down 4% since September 7. This may be a decline in anticipation of a Trump victory, a decline for other reasons or a random move for no reason at all.
- If Trump is elected and the market declines as a result, the decline may be short and temporary. This is what happened with the “Brexit” vote. Doing nothing was a good strategy.
- Perhaps the markets will rise, seeing Trump as more pro-business.
- If a decline were substantial, how would you know when to reinvest? After a 5% drop? 10%? 20%?
This last point is critical for “market timers" which are those who try to get out of the market before a decline and reinvest before the market recovers. Market timing is a difficult strategy, requiring two good decisions: when to get out of your investments and when to get back in. Getting either wrong could result in a loss instead of a profit.
Markets have already declined. S&P 500 Index funds peaked on September 7, 2016. That could be in anticipation of either a Trump or Clinton victory or have nothing to do with the election.
Having said that, it wouldn’t be surprising if a Trump victory caused the stock, and perhaps bond markets, to fall. Partly because the markets hate uncertainly and a Trump presidency seems more uncertain than a Clinton presidency. But also because we are overdue for a 20% or greater stock market decline and bonds are at or near all-time highs. A Trump victory could be the catalyst for a substantial decline that was inevitably going to happen at some point.
From 1900 to 2015, stock market corrections of 20% or more occurred, on average, every 3.5 years. The last 20% or greater correction was in March of 2009 as you can see in the chart below. This was more than seven years ago so as stated, a large decline is overdue.
While a 20%+ declines is scary, remember that, historically, larger declines were typically followed by larger recoveries. The average annual five-year rate of return after major declines ranged from 17% to 36% as illustrated below. Stock investors who did nothing before a decline, profited.
As a result, investors in well-diversified and well-managed stock portfolios did not have to buy and sell to profit. They only had to buy and hold for a sufficiently long period of time. Their patience was ultimately rewarded.
Of course, past performance is no guarantee of future performance. It is possible that the stock and/or bond markets may decline and not recover for an extended period of time. Stocks are a long-term investment and stock investors should be prepared for these long declines.
This is for educational purposes only. To learn more about the topics mentioned and if they are suitable for you, consult an appropriate professional. Tax laws can change at any time.
Any information provided in this presentation has been prepared from sources believed to be reliable, but is not guaranteed and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for information purposes only and does not constitute a recommendation.
Keep in mind that:
- Past performance is no guarantee of future performance;
- Investments involve the risk of loss of principal and earnings;
- ETFs, mutual funds, money market funds, etc. are not guaranteed by the US Government, the FDIC, a bank or anyone else.
- “Average annual return” evens out variations in the actual year-to-year returns.
- ETFs, mutual funds and individual stocks and bonds fluctuate in value and there will always be times when they lose value.
- None of the information provided is necessarily relevant to anyone’s personal situation. Circumstances differ among individuals and they should not assume that these generalizations or information apply to them.
- Investments mentioned may not be suitable for all investors.
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