Do you have sweaty palms? Heart palpitations? Recent trouble sleeping at night? If so, you’re not alone. This has been one of the most divisive campaigns ever, and many people are reporting elevated levels of stress.
The angst is even higher for those with large portfolio balances, because election day almost always precedes major moves in the financial markets. But while investors should expect and be prepared for volatility, they should also remain conscious of the fact that our economy is doing just fine.
We’ll get into more details about the economy shortly, but first, let’s address how the global investment community has been responding to the political news.
Equity markets gapped higher yesterday morning after the FBI said that no new evidence was found to warrant charges against Hillary Clinton.
As you know, markets hate uncertainty, and the run-up to this election has been filled with uncertainty. Tightening polls in recent weeks led to the S&P notching nine consecutive sessions of losses, a feat not seen in 36 years.
If you were unsure who the financial markets collectively want to win, the answer should be dead obvious after yesterday. The latest FBI announcement has boosted Mrs. Clinton’s chance of winning, and also removed a major overhang (federal indictment) should she win.
And it isn’t just the US that’s reacting positively; in a coordinated fashion, stock markets across the globe surged higher on yesterday’s announcement.
That being said, a Clinton win is still not guaranteed, and investors should remain prepared for a bout of volatility following the election results.
Here’s what to expect:
Moves after the election are notoriously violent. Historically, the S&P 500 swings an average of 1.5% on the day after the vote. That’s the equivalent of about 270 Dow points.
But, as Bloomberg is quick to point out, the move following election day results is accurate in predicting the direction of the S&P over the next 12-months less than half the time.
What this suggests is that regardless of how the market behaves today, you should not assume that the move is indicative of a longer trend. The post-election moves are often a function of traders and major institutions unwinding trades, and as time stretches on, attention goes back to the underlying dynamics of our economy.
This means that whatever happens on election night, don’t panic. Unless of course Trump wins. Just kidding.
Actually I’m not. My gut instinct is that a Trump win would evoke so much uncertainty about everything from policy to personnel that investors would be compelled to de-risk substantially. While that may or may not be the case, it seems fair to say that at the very least, a Trump victory would involve more uncertainty than a Clinton victory.
That sentiment is echoed elsewhere as well. A paper written by Justin Wolfers, from the University of Michigan, and Eric Zitzewitz, from Dartmouth, (both of whom are affiliated with the National Bureau of Economic Research) suggests that a Trump victory could send global markets lower by 10-15%.
Similar analysis by Barclays suggests a decline of 11-13% if Trump wins vs. a 2-3% rise if Clinton comes out on top.
But regardless of who wins, the value of your portfolio over the long run depends primarily on economic fundamentals, and those aren’t looking too bad.
Last week was extremely data-heavy, and most of the data was positive. Consider these bullet points:
- Personal income rose 0.3% in September, and is up 3.2% year-over year.
- Consumer spending rose 0.5% in September, and is up 3.7% year-over-year.
- Both core and headline inflation are rising (we’re not falling into a deflationary abyss). Core PCE is up 1.7% over the last year and headline inflation is up 1.2%.
- ISM manufacturing index is back in expansion territory, recently at 51.9%. Other measures of manufacturing strength, including the Markit PMI, show similar strength.
- Weekly jobless claims remain near all-time lows, most recently at 265,000.
- Productivity showed signs of life during the 3rd quarter, rising 3.1% (even though the longer term trend is still weak).
- Labor costs are rising, with unit-labor costs up 2.3% over the past year.
- Compensation in the form of wages and benefits increased at a 3.4% annual rate during the 3rd quarter. In real (inflation adjusted) terms, compensation is rising at a 1.7% rate.
- ISM services index remains strong, recently at 54.8% in September and still signaling solid expansion. (Currently about 8 out of 10 American workers are in the service industry.)
- Factory orders for September rose 0.3%, and previous months’ figures were revised higher. This is suggestive of a stabilizing manufacturing sector.
- Nonfarm payrolls show continued job creation, albeit at more sustainable levels. The economy added a seasonally adjusted 161,000 jobs in October.
- Average hourly earnings rose 0.4% in October and are up 2.8% year-over-year. The annual growth in hourly earnings is rising, and is at the highest level since 2009.
All of these factors suggest that the economy, while not necessarily robust, is doing just fine. And since economies tend to maintain an element of inertia (they don’t change on a dime), chances are the economy will be just fine for at least the next few months.
So as I stated earlier, regardless of who wins today and how the markets react on Wednesday, don’t succumb to emotional investment decisions. Once we know who the winner is and get a better idea for what it means for the economy, we’ll reassess the situation and react accordingly.
The preceding content was an excerpt from Dow Theory Letters. To receive their daily updates and research, click here to subscribe.
