The election season has come to an end and we now know the results. This whole process has been nothing short of the classic phrase “It’s different this time” with the amount of surprises and distractions that came up along the way. Yesterday the masses went to the polls and surprised the pollsters, and throughout the whole campaign season, markets have been a bit distracted.
We’ve seen this distraction unfold in the form of shorter-term volatility. The markets have been rising or falling based upon different priced-in outcomes. Essentially, the market is one giant voting machine. Every second it is taking the pulse of all information, including elections, into account. As expectations change, so does the market. The quicker and more radically those expectations change, the more radically the price of the market swings. Just think of Brexit. In late June the market had priced in an 80% chance that Britain would vote to stay in the European Union. When that went the other way, a big adjustment happened, and happened rapidly.
Politics completely aside, we are now left in a similar situation. Many outlets that tracked live odds of Clinton winning vs. Trump had put her at the 80% mark leading up to Election Day, eerily similar to Brexit odds. Like Brexit, this may lead to a quick and sharp stock market reaction. In fact, in the days following Brexit, global stock markets fell anywhere between 5-10% in two days.
Overnight volatility was definitely on the rise. Japanese markets fell over 5% based upon our election news. The market futures in the U.S. also had big swings as the outcome became more known. At one point, it was priced to open down over 800 points this morning.
Even if this does materialize into a terrible market day, we have to take things into context. Brexit reminded all of us of some great lessons. While the markets were hammered for two straight days leading many to think this was going to be the catalyst for a global stock market correction, long-term focus again came in to save the day. After all, the vote was known in the U.K. in June, but the outcome of what that truly meant wouldn’t be known for years. As a result, markets quickly bounced back from the two day swoon in June. In our markets, we’ve seen this bounce back happen so far in a matter of hours.
This is actually quite normal. In fact, in the below chart you can see the impact of missing the best days in the market on your portfolio over the last 20 years. While it’s easy to think that these good days come in good times, you can see from the chart that 6 out of the 10 best days actually occurred within a very short period of time of the absolute worst days.
Markets are resilient. You may have heard us talk about the market typically being up in Presidential election years. This year that has been the case as well. Over the longer-term in the years of a Presidential election from 1928-2013, the S&P 500 gained 11.2% on average. Now that the election is over, what now? Well, returns in the years following elections have averaged 9.3% and 75% of the time between the election and year-end, markets have been positive when a Republican presidential candidate wins and is not the incumbent party.
Over time we know the market goes up and the election year numbers above are not too far away from a plain old average year. Over all the years, election year or not, the market had an average return of 11.8%. In order to get those returns, you need to be invested, regardless of political outcomes. You need to be on the far left-hand side of the chart above. So even though political outcomes can impact the market, they are just one of thousands of things that can and will. To place the success of your investments upon a guess about the impact an election has injects unnecessary risk into an otherwise sound investment strategy that is already positioned for good days and bad.
The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market, this world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy.