What the Election Means for Your Portfolio

Just as markets were surprised when British voters elected to leave the European Union, markets wrongly expected Clinton to win last night.

When it first became apparent that Trump had a credible path to victory around 10:30 pm CST last night, markets turned negative with futures on the Dow Jones showing a decline of -750 points.

In addition to falling stock prices, bond prices rose sharply, with the yield on the 10-year Treasury dropping to 1.71 percent after closing at 1.88 percent yesterday (bond prices rise when yields fall).

Thankfully, around the time of Trump’s victory speech, markets started to recover from the knee-jerk response.  Pre-market indicators suggest that stocks prices are still lower, but are within the bounds of a relatively normal trading session.

Bonds have shifted course as well with the yield on the 10-year Treasury jumping to 1.93 percent this morning.  As you might expect, currencies and commodities are also all over the board with stocks and bonds.

In short, investors around the world are resetting prices based on new information.  While markets had wrongly anticipated the outcome, prices quickly reflect the reality once it becomes known.

While a big event like the Brexit or this election make good and easy fodder for media outlets (and newsletter writers), the reality is that regardless of who won, markets were going to respond with a lot of volatility in the short run.

According to data from Vanguard, volatility spikes just before and after Election Day, but stabilizes to normal levels 100-200 days after the actual vote.  They also note that whenever the party changes in the executive branch, that volatility is 30-40 percent higher, but there isn’t a distinction between the two parties.

Over the long run, the sharp swings surrounding elections mostly winds out as noise.  Sooner or later, regardless of the event that caused extra volatility, markets get back to fundamentals like earnings, revenue and good old fashioned valuation.

It’s always good advice to avoid dramatic event-based changes in your portfolio and that’s just as true today it was after the Brexit, every other surprise election outcome (this isn’t the first, think Dewey Defeats Truman, although that wasn’t the first either) or any other big piece of new information that affects prices.

A major change to your portfolio based on the election results is nothing more than a big prediction – one that could have major consequences to your financial goals.

If anything, last night was a vivid reminder that predictions are difficult to get right – just look at the poll averages from yesterday (although Trump’s main pollster, Kellyanne Conway, tweeted that ‘not ALL pollsters’ got it wrong).

As one Vanguard economist said, markets aren’t ideological, they are much more pragmatic.  Regardless of whether you’re happy or sad about the outcome, take the pragmatic approach to your portfolio.