As evidenced by betting markets and poll aggregators like Nate Silver’s FiveThirtyEight model, the stock market priced in a win for Hillary Clinton ahead of yesterday’s election. Donald Trump’s victory certainly caught investors off guard. While Trump is a bit of a wild card, bringing economic and political uncertainty into the equation, the end of the election brings a level of stability to financial markets.
S&P 500 futures initially tumbled as much as 5% late Tuesday night, triggering a trading halt, but when the market opened Wednesday morning, investors had digested the news and the market actually rallied throughout the day. The market fear gauge, VIX, which breached 20 ahead of the election, is down to 14 this morning.
As we’ve previously pointed out, elections historically have very little effect on the stock market – the trend prior to the election continues after the election. Initial evidence appears to again prove this to be true.
Longer term, with the new policies that come with a new president, there will almost certainly be change in the performance and outlook of various sectors and industries. Biotechs, which were to face the prospect of pricing pressure from a Clinton administration, rallied 9% while health care equipment and services companies, which benefit from Obamacare, fell. We do not know the details behind the majority of Donald Trump’s policies but as these details become clearer, we expect to see additional sector and industry rotations. This underscores the importance of diversifying across sectors and industry groups, as we do in our portfolios.
If anything, this election serves as yet another lesson that it is impossible to predict how the stock market will react in the short term. There was evidence to suggest a Trump victory would be a negative for the stock market but our official stance was always to stay invested and keep the faith. When investors fail to reach their long-term goals, they fail due to self-destructive decisions like market timing and performance chasing. The only way to capture the market’s appreciation over time is to stick it out through thick and thin, exposing ourselves to every market panic that occurs to ensure being in the market at the right times. Successful investing requires this discipline.