CNBC called at 12:30am and asked that I come on air between 2 and 3 am for comment. Dow futures were down almost 800 points, and returns in Pennsylvania and Michigan were still too close to call. I watched returns over the next few hours and watched President-elect Trump’s victory speech. He was statesmanlike, conciliatory, respectful and spoke with a tone I hadn’t heard during his campaign. Folks this morning are either elated or devastated. Emotions, both high and low, are intense. We have long warned that emotions are the foe of the long term investor. Beware of these strong emotions. Markets are without passion and mechanical. They price things. They determine a number for current conditions and future expectations. Markets expected a Clinton presidency and are repricing for a Trump presidency. The benign open this morning is yet another in a series of remarkable surprises. Investors are, generally, bidding up the prices of drug companies, infrastructure stocks, defense stocks, commodity stocks and banks while punishing the shares of companies reliant on global trade, outsourcing, and other areas that Trump has railed against. We expect increased volatility in the weeks and months ahead. The Trump presidency raises many questions for investors. Markets generally dislike uncertainty. Will Trump the candidate be replaced by a calmer and more conciliatory President Trump? Will he be able to get Congress to work together? What happens with immigration, free trade, taxes, regulation, infrastructure spending, Fed policy, international relations, the Affordable Care Act, the Supreme Court, his cabinet, etc, etc, etc. Half the country is shocked and terrified by his victory and the other half is ecstatic. What does this mean? Can we heal the divisiveness currently rupturing the country?
All of this stuff matters a lot to stock prices. Unfortunately, it isn’t possible to accurately assess the probabilities of all of these different scenarios occurring and then to accurately assess which sectors and companies will benefit and which will be hurt. Short-term traders often try to do this but with limited long-term success. This reminds us all that the future is ALWAYS uncertain. And, we seem to ALWAYS be surprised when things don’t turn out the way that we expect them to. This is human nature. The most sophisticated polling operations in the world missed the outcome of this election entirely. The market’s immediate reaction to a Trump victory was to indicate an 800 point drop. As I write, the Dow is up over 100 points. How is this even possible? Who would have predicted this type of swing?
So what do we do in an uncertain world? The answer is that we do what we have always done. We focus on what we know and what we can control. We can’t control the market but we can control sticking to our conservative investment discipline. We tell clients that we want to build a portfolio that will benefit from a 20% increase in the market and endure a 20% drop. We know that carefully constructed, diversified portfolios of well-researched, high-quality individual stocks and bonds have helped our clients achieve their goals over long periods of time despite periods of extreme market turmoil (e.g. bursting of dot.com bubble and the financial crisis).
Our research analysts and portfolio managers will, as always, continue to analyze the information germane to each of our companies. We will eventually be able to better assess and answer some of the questions from our earlier paragraph and will then, if necessary, make portfolio changes accordingly. Though we are buy-to-hold investors, there are times when our discipline points us towards more significant activity in our portfolios. The move to dramatically reduce our client’s exposure to financial stocks in the months before the financial crisis is one such an example. Will we feel the need to do this again? We don’t feel that way today but perhaps this will change. As always, we will let our investment discipline guide us in this area.
This election has been an incredibly stressful experience for voters on both sides of the aisle. This anxiety is bad for individuals and it is bad for the country as a whole. Please take care and call us if there is anything that we can do for you.