Three Lessons from the 2016 US Election

December 1, 2016.

Some memorable pre-election quotes…
 
July 13, 2015: "The chance of Donald Trump winning [the] nomination and election is exactly zero.” James Fallows, The Atlantic
July 19, 2015: "Trump is toast after insult: 'McCain not a war hero.' " Cover of NY Post
Aug. 15, 2016: "That's a guy who knows he is going to lose…I don't know that he's ever wanted to win. It's sad.” Joe Scarborough, MSNBC
Aug. 26, 2015: "Donald Trump is going to lose because he is crazy." Jonathan Chait, New York Magazine
Sept. 22, 2015: "Historians looking back will peg the beginning of the end of the Trump show to his New Hampshire moment last week."  Arianna Huffington
Oct. 18, 2016: "The good news: He will lose this election badly, by which I mean poorly…He will lose the popular vote, and…the electoral vote." Jim Nelson, GQ
Oct. 21, 2016: “Market participants quoted in the financial press suggest an apparent consensus that a Trump victory would lower equity prices, weaken the economy, and increase risk.”  Eric Zitzewitz, Justin Wolfers, Brookings Institute
Nov. 8, 2016: "Hillary Clinton has an 85 percent chance to win." Upshot
 
Twenty years from now, it will be interesting to see how history looks back on the 2016 US Election.  Looking at the final results, there is now no doubt the media’s consensus and election polling were completely inaccurate.  Similarly, the reaction from the market was also the opposite of what the media had been expecting.  Somewhere after midnight and four in the morning of November 9th, not long after Donald J. Trump’s victory speech, a rare phenomenon came over the markets.  Perhaps it was sense of American nationalism or the realization that several months of uncertainty had come to an end - or perhaps it was something larger.  Besides Trump becoming America’s next Commander in Chief, the election provided the Republican Party with control of the US House of Representatives and Congress for the first time in eight years.  In fact, this election ‘hat-trick’ outcome has only occurred thirteen times since 1901.  Needless to say, with US markets now at new highs, this recent event has provided a reminder of a few general lessons we should hope to remember when we encounter the next market surprise.        
  1. Herd Mentalities go beyond the Markets: Peter Lynch once said, the “real key to making money in stocks is not getting scared out of them.”  Much like the media coverage during the UK Brexit Referendum earlier this year, the US media was mostly unanimous on the outcome and also adamant an alternate outcome would impact the markets.   However, as noted in earlier comments, political risk is often the most significant risk one can encounter when investing - but it is equally difficult to understand and predict.  Speaking with investors after the UK Brexit event, I was dismayed to find some had completely exited the market because they were terrified by the overwhelmingly negative consensus in the news.  In this age of ‘real-time’ social media, we are constantly bombarded by headlines that attempt to divert our attention to matters that, in some cases, may not have any relevance to our lives at all.   
  2. By investing time in a prudent Investment Strategy, life should become easier:  In hindsight, investment wisdom always sounds perfect.  Similarly, Investment Strategies may appear perfect on paper, but unfold differently in the real word.  As such, I am an advocate of regular portfolio review and prudent diversification.  By taking the time to review your latest portfolio results and asset allocation (the ratio of various asset classes and their potential for volatility), we may potentially offset the impact of future market surprises and more important, avoid losing track of your original investment objectives and life goals.   For retired investors relying on income from a large percentage of blue-chip dividend paying stocks in their portfolio, this approach to investing could prove to be just as valuable as the investments themselves.   
  3. Never Overlook the Big Picture: As we approached the November election, I found it interesting that the media largely ignored a segment of market strategists who had repeatedly claimed the US economy was improving.  In fact, even after the US Labor Department reported a solid year-over-year improvement in wages confirming this observation (September), the media's focus remained on Washington.  With little surprise, when the markets surged in November, the media's response was a combination of skepticism and awe.  During such times, we should refer to the timeless insight of Benjamin Graham (Chicago School of Business); "in the short run, the market is a voting machine but in the long run, it is a weighing machine.”  Despite all the media sensation during the US election, because the underlying backdrop of evidence continued to support the improvement of the US economy, the market tuned out media distractions much like it did in 1955, 1982, 2009 and yes, 2016.  And of course, during those years the market proved to be a much more valuable teacher than any headline.           
Cheers,  James.
Media Sources:
http://bloom.bg/2hNJXnA
https://www.washingtonpost.com/news/the-fix/wp/2016/11/09/the-wrongest-media-predictions-about-donald-trump/
https://www.brookings.edu/research/what-do-financial-markets-think-of-the-2016-election/
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