Donald J Trump has won one of the most acrimonious presidential elections battles in recent US history. He will become the most powerful man on the planet and the leader of the world’s largest economy.
You might think, therefore, that the outcome of the election will lead to some big shifts in a long term investment strategy, but it will not. Here’s why:
Current market prices are an up-to-the-minute snapshot of the aggregate expectations of market participants. What this means is that the millions of market participants around the world are acting (transacting) on their expectations about future returns. Buyers and sellers are exchanging opinions about future returns at the same time they are exchanging assets, and those opinions include views about the impact of the election. Unanticipated future events may lead to changes of opinion, but it is unlikely that investors can gain an edge by attempting to predict what effect the election will have on markets.
What history tells us
The longer term market impact of presidential elections is smaller than you might think. In the US stock market since 1926, all the months during which presidential elections have been held fall well within the typical range of returns, regardless of which party won the election.
And this chart illustrates that regardless of which party won, the US stock market has provided substantial returns.
Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor’s Index Services Group.
It is reasonable to apply the same long-term thinking to other markets and other big macro events, such as Britain’s exit from the EU and leadership changes elsewhere in the region. We do not know what the outcome or effect of these events will be, but we do know that markets express aggregate expectations in prices and that long-term returns reward patient, disciplined investors.
Uncomfortable short term volatility
That said every now and then unexpected events can take people by surprise in the short term. That happened recently with the UK’s EU referendum and it caused a flurry of activity across world markets. Short-term volatility can make investing in shares uncomfortable but that discomfort comes with the territory and it’s important to keep it in perspective.
Here at Price Bailey, when we work with those who have a longer term investment strategy we use stocks and bonds to provide the growth required to achieve a positive return, above inflation. The value of shares can rise and fall from day to day, month to month and even from year to year. But, over time, they have provided a higher return than many other comparable assets.
The below chart shows the MSCI All Country World Index, a broad index of stocks from around the world across both developed and emerging equity markets, and, for historical context, a selection of news headlines. It is clear that recent volatility is not unprecedented and while uncertainty can make investing uncomfortable, world stock markets are still capable of delivering a positive return in the long term. Since 1988, when this index starts, £1 invested has grown to £10.84*.
The message is this: stick to the plan, even during times of uncertainty. It sounds simple but requires self-discipline and with that discipline comes the ability to take surprises in your stride.
*Source: MSCI data ©MSCI 2016, all rights reserved. Figures in GBP as of 1 June 2016. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Actual returns may be lower.
This post was written by Steven McGregor, Chartered Wealth Manager for Price Bailey’s Discretionary Portfolio Service. Steven helps clients to gain exposure to the stock market via risk rated portfolios. You can contact him at [email protected].