Now that the election is over, people are trying to sort out where to go from here. Donald Trump was not expected to win, and this has caused massive uncertainty – in both directions. Half of the country is excited for the changes he is promising, and the other half fears what a Trump presidency means.
President-Elect Trump is not a traditional politician, and that means that we aren’t entirely sure how he is going to govern. Which, again, the country is split on.
So the big question is: What’s next?
We’re all asking this question about pretty much everything – including the markets. But as we think about what a Trump presidency means, we should keep a couple things in mind.
The Limits of Presidential Power
The president is the most powerful person in the world. He has a free hand in many different policy areas, and is the embodiment of one-third of the American government. But he is not omnipotent.
The American government was built on the same series of checks and balances we all learned in school. They are there for a reason – to slow government down and limit the power of any single branch.
Even though Republicans control both houses of Congress, there are limits to what Trump can get them to do. The GOP has the slimmest of majorities in the Senate, which means Trump needs to worry about the threat of Democratic filibusters and keeping the more moderate Republicans on board.
We’re also still waiting to see what the Trump administration will look like. Personnel is policy. As we find out who is going to be in the administration, we will get more information about just what Trump is going to be trying to do in office. Right now, his administration is a blank slate, but it’ll start filling up in the next couple of weeks. As this happens we’ll learn a lot more about what the Trump presidency will actually look like.
There’s ALWAYS a Crisis
As the late Andy Rooney put it: “It’s just amazing how long this country has been going to hell without ever having got there.”
Since just last summer, we’ve had four “this time it’s different” events:
- July 2015 – The Greek debt referendum and Chinese market volatility
- August 2015 – Black Monday and the surrounding volatility
- January 2016 – Turmoil in the Chinese Markets
- June 2016 – Brexit
And those are just the ones that I wrote specific articles on. There have been countless smaller crises during this time. And every time, “everyone” thought something was fundamentally changing in the markets.
With Greece, we thought the EU would break up. With China, it was a signal that the Chinese economy would collapse. With Black Monday, people thought it meant they shouldn’t invest in equity. And people thought Brexit meant the EU was breaking up again, and that the UK was destroying its economy.
Whenever something big happens, we think it’s going to change everything. But we need to remember that we tend to overreact to recent events. It’s one of the basic insights from behavioral finance.
This doesn’t necessarily mean it’s not different this time. Just because you’re paranoid doesn’t mean they aren’t out to get you. But it doesn’t seem to be the way to bet.
And even if it was different this time, it’s not clear how. Half the country thinks the difference of a Trump presidency is that he will destroy the country, the other half thinks he’ll unleash the pent-up productivity of the country. We just don’t know at this point.
So What Should You Do?
The question remains: What should you do to protect your portfolio? I feel guilty saying this because it sounds trite, but you shouldn’t do anything. Assuming that you have built your portfolio around your appropriate risk tolerance and capacity, this isn’t the time to make any unplanned changes.
We don’t know what the market will do next. Since the election, the US equity markets have done reasonably well, but tomorrow could be a different story.
The market moves based on what it expects to happen next. If events are better than expectations, prices will go up. If they don’t measure up to expectations, prices will go down.
In other words, unless we can predict the future, we cannot predict what the market will do. So, we do what we always do – build portfolios around your appropriate level of risk, focus on the long term, and harvest the market returns you deserve.
As Warren Buffett said in his 2012 letter to Berkshire Hathaway shareholders:
“America has faced the unknown since 1776. It’s just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them (usually because the recent past has been uneventful). American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor. … The risks of being out of the game are huge compared to the risks of being in it.”
Investors who stay disciplined and stick it out have historically been rewarded. Even if the Trump presidency turns out to be poison for the markets, presidential terms are only four years. Long-term investors are focused far beyond the next election.
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