Only One Thing Is Certain: Markets Hate Uncertainty

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The surprise showing by Mr. Trump stunned commentators and markets alike, sending overseas markets and US futures into a tailspin.  Regardless of who you voted for, the markets had already voted for predictability in the form of Secretary Clinton as President and a Republican controlled Congress.  Said differently, a Clinton win meant the devil we know as President and a governor on her power via Congress.

Mr. Trump’s campaign was a movement of sorts, giving voice to the disenfranchised.  And, very much like Brexit, this decision leaves many investors aghast and even surprised those who voted in favor of a promise for radical change. What the markets are reacting to likely stems from the following:

• A Republican President, a Republican House of Representatives, and a Republican Senate mean bills introduced by Mr. Trump are likely to glide into law.  Given that Mr. Trump has been prone to less conventional means of campaigning and suggestion of change, the markets are facing uncertainty in a relatively undefined platform.
• Mr. Trump campaigned heavily on jobs and trade reform and the markets – again – see tremendous uncertainty in changing trade agreements.
• Immigration.  Mr. Trump has driven home his promise to close borders and to build a wall between the US and Mexico.  The markets are likely reacting to a radical change in US policy and its effects on foreign trade.

The British are Leaving – What we learned from Brexit

It should be fresh in your mind that this kind of stunning upset surprised the market this summer when the Brexit referendum swung against predictions and Britain’s voters signaled via popular vote to exit the European Union.  And the markets swooned.  The Vanguard FTSE 100 tumbled almost 6.5% the day after the vote, only to recover it’s ground and reach new highs in a matter of months.  Markets don’t like uncertainty.

So, what does this mean for investors in the United States?  Markets tend to overreact to news and certainly to surprises.  We often quote Mr. Buffett and will re-cycle his Benjamin Graham adage that short-term the market is a voting machine and long-term it is a weighing machine and the rush to react is a vote; there has been no impact as a result of this election on the weight of global industry.  Markets will recover and the pendulum will shorten it’s swing.  Accordingly, we stick by our major themes and offer the following opportunities:

• We believe in capitalism and that over long periods of time stocks will beat bonds, and bonds will beat cash.  The premium, however, is volatility.
• Our clients are diversified globally and across asset classes, including fixed income.  Despite headlines of market selloffs, the likely impact to any individual portfolio should be muted.
• Over the short-term news influences market reactions.  However, over longer time periods fundamentals drive performance and that data has been improving. While Goldman Sachs has suggested slow, but steady EPS growth for the S&P 500 for 2017, most of Wall Street predicted 12.4% EPS growth in 2017.¹
  
  
• Regardless of who you voted for, Mr. Trump will soon be OUR President.  Americans are exceptionally resilient and market fears should give way to pragmatism.  If Mr. Trump is to make America great again, then he may very well ease on promises that trouble the markets today and surface plans that allow for continued growth.

It is true that the world was handed another surprise last night with the 2016 Presidential vote.  But that means little in the face of capitalism.  No single leader or party will likely overwhelm the engines of progress.  Consider that it will be months before Mr. Trump’s platform will be finalized, his cabinet selected, and his powers transitioned.  During that time the surprise of this outcome will dull and life will continue.  The markets will forge ahead.  We have already survived the uncertainty of the global meltdown that was 2008, we have survived the uncertainty of Brexit, and the market will put the shock of this upset in its rearview mirror in due time.  This is yet again an opportunity to remind ourselves of the benefits of investment discipline and to keep in mind the long-term nature of our goals.  Of that, we are certain.

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¹https://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_10.21.16

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