Clearly the polls got it wrong on this election and the markets were more expecting a different outcome as recently as yesterday. We see the likely volatility indicated by the early futures today, but it’s a little comforting to see a bit of calmness return, as the futures have moved from minus 800 to minus under 300 points on the Dow Jones Industrial Average, which is less than it went up on Monday.
At this point the American people have chosen the rather imperfect nonpolitician over the politics as usual. This will likely create volatility in how things are done at many levels, and certainly will be affecting the markets for more than just today.
A brief moment to focus on the facts according to Bloomberg: “In the 22 elections going back to 1928, the S&P 500 has fallen 15 times the day after polls close, for an average loss of 1.8 percent. Nothing shows the unreliability of first-day signals more than the routs that accompanied victories by Obama, whose election in the midst of the 2008 financial crisis preceded a two-day plunge in which more than $2 trillion of global share value was erased. It wasn’t much better in 2012, when Election Day was followed by a two-day drop that swelled to 3.6 percent in the S&P 500, at the time the worst drop in a year. Of course, Obama has been anything but bad for equities — or at least, he hasn’t gotten in their way. The S&P 500 has posted an average annual gain of 13.3 percent since Nov. 4, 2008, better than nine of the previous 12 administrations. Data like that imply investors struggle to process the meaning of a new president just after Election Day, or infuse the winner with greater influence than they have.”
We did suspect the possibility of this outcome and the subsequent volatility and did move a bit to cash taking some profits in your managed accounts on Monday, in addition to the underweighted equity positions we’ve held until now. Also, we will be watching our portfolios closely today as things may not play out as volatile for us either. Several positions we have that recently have been hurt by the markets, may actually get some help in the coming days, such as our positions in energy, healthcare, biotech and gold. We will be looking at this volatility for the possible opportunities it may offer us, and we have already been researching the likely areas of the market that will benefit from this outcome. We now stand in a good position to let things settle and take full advantage of opportunities we have been watching, and that are now likely much cheaper. Furthermore, we must not lose sight that the economy is on solid track.
History shows that it is typical for markets to be down roughly 2-3% pre-elections. History also shows markets up 2% within a month after on average, and election years tend to produce overall average total S&P returns of roughly 7%.
Change happens, and this will likely be a big change for America, but life will go on, and the markets will go on. Please be reassured that we will be steadfast in our pursuit of the best high conviction ideas as part of your diversified long-term oriented portfolio.