Who does the stock market “want” to win?
Hillary Clinton. This isn’t a partisan statement, but simply a statement of fact. There may be several indicators to which we could point, but the glaring one is this: When the FBI announced last Friday that a new slew of emails had been discovered that could impact its investigation and shed further negative light on Clinton’s handling of classified emails, the market sold off. Period.
But why? Is the market more Democrat than Republican?
No. In fact, you may recall the George Bush/Al Gore recount in 2000, when the market seemed to cheer in Bush’s favor. But what the market really doesn’t like is unpredictability, and it has asserted its opinion that Donald Trump is a more unpredictable candidate than Clinton.
Does that mean the market could sell off if Trump wins?
Perhaps, but here we move beyond the realm of the market’s preference. While we know that it prefers political consistency—gridlock, even (however distasteful it feels to us citizens paying the bill)—what the market really despises is surprises. The market has quite efficiently weighed every bit of information regarding the election and estimated that Clinton will win.
But compounding the market’s hesitancy with a potentially volatile President Trump could be its distaste for surprises. Do you remember the days following the Brexit vote? Everyone thought the Brits would remain in the European Union going into the vote; that’s why the market went bonkers when they bolted. (Of course, after the market processed all the new information, it proceeded to move onto new highs.)
So, should you make any portfolio adjustments before or after the election?
Before? No. After? Maybe. Before the election, I encourage you to exercise active ambivalence. Don’t be counted among those who shudder at every media circus du jour. Whatever the result, it will happen, and then we will move on. So will our portfolios. To make a move now wouldn’t be an investment choice, but a gamble.
But what if Trump surprises the market and wins? Should you do something then? First, if Trump does surprise the market, and the market doesn’t like the surprise, it will likely move faster than you. But more importantly, it doesn’t matter.
Are you planning to spend the money you currently have invested on Wednesday morning, or even within the next five years? If so, you likely shouldn’t be in the stock market anyways. If not, the same logic that applies to every market aberration applies in this (potential) instance as well: Our concern should rest with where the market will be when we actually need the money—likely many years down the road. And the evidence just keeps pointing to a blatant truth: Attempts to outguess the market typically end up hurting investors—even professional investors—more than it helps them.
Inaction is almost always preferable to action, to paraphrase Warren Buffett.
Therefore, the only potential adjustment I would recommend is, if Trump surprises the market and if the market responds with a short-term crash, to rebalance back to your planned asset allocation if the dip proves substantial enough or provides an opportunity for tax-loss harvesting.
Of course, to rebalance back to your original financial plan requires that you have one. So, if you’re an investor whose plan continues to sway with the headlines or the financial industry’s newest sales pitch, then this (potential) market event is as good as any to compel you to do the work to develop a genuine, long-term and evidence-based plan. And then stick with it.
In closing, my colleague, Larry Swedroe, reflected that a study on the intersection of politics and investing “showed that people’s optimism toward both the financial markets and the economy is dynamically influenced by their political affiliation and the existing political climate,” often to their detriment.
I urge you, therefore, not to confuse your politics with your portfolio —and while I certainly do hope you cast a ballot on Tuesday, please don’t vote with your investments.