Since the beginning of this year, the Canadian stock market is up about 5% and the US market is up over 7% extending their gains from the last part of 2023. It is obviously too early to tell how this year will end but it is starting out as a typical election year in the market which is to say it is up. Will it continue going up? What about the US election? What if Trump wins again? As you probably guessed, these are the questions I’m being asked right now.
By their very nature, all of these questions are short term in scope. In fairness, that’s the way many investors think especially if they have a tendency to watch the markets on a regular basis. My time horizon is much, much longer than a few weeks or months. For me, 3 to 5 years is short term. Despite my bias towards the long term, I think there is tremendous value in examining the potential answers to these questions and can be very helpful in asset allocation and entry and exit decisions.
What I have learned after nearly 30 years in the financial business, is that while the answers to some questions are important, it is more important to understand what the market wants answers to. For example, a question I will get often is how will the market react if Trump wins the election? This is a good question but I think the market will want the answer to a slightly different question: what effect would a Trump win have on the economy and public company earnings? They are similar questions but the answers will sometimes carry different meaning. Over time, what makes stocks go up are rising profits. Nothing else matters to the market and I have seen many investors in my career ignore this fact to their own peril.
I’ve told this story many times so forgive me if you’ve already heard it but it illustrates my point perfectly. In September 2016, just before the election that saw Trump win over Hilary Clinton, I had a client in my office for a regular review. He was a retired investor with about $1,000,000 with roughly half in stocks and half in fixed income and had been a client for over 20 years at that point. To protect his privacy, let’s call him Wilfrid. Here’s roughly how our conversation went:
Wilfrid: Luigi, I’ve decided to sell all my stocks.
Me: Really, why?
Wilfrid: Because if Donald Trump gets elected, the market is going to crash. He is a terrible person and it will wreak havoc on the markets!
Me: [Trying to be calm] Well, Wilfrid, he may be a terrible person but I doubt that the markets would crash and, in fact, I think the opposite could happen and markets could go up. You see, the market will likely be favorable to his policies such as deregulation and tax cuts.
Wilfrid: I disagree – the markets are going to crash and when they do, I will get back in.
Me: Wilfrid, I have to be honest with you, I think you’re making a mistake that could be very costly for your portfolio.
Wilfrid: I appreciate your advice but I want to sell all my stocks.
I’m not going to lie – I was very disappointed and very concerned about Wilfrid’s decision. The night of the election, I literally stayed up all night to watch the reaction in markets starting with Asia, then Europe when they opened and most importantly, US stock futures. It was US stock futures that would be the best indication of how the market was going to open. I have to give Wilfrid credit. He was right about Trump winning and about the “crash”. US stock futures went down by as much as 9% overnight which was an indication of how down the market would be. By the time the market opened, futures were up and the market was, too. It basically went up for about the next three years and because he had sold his stock, I estimate he lost out on about $200,000 of gains during that time.
I wish I could tell you that this story has a happy ending but it doesn’t. I happened to call him on March 23rd, 2020. This was during the height of Covid, of course, but what I could not have possibly known that this was the day the market bottomed. I had observed in Europe that even though Covid cases kept rising, the market had turned around in places like Italy and Spain and I thought it was likely the same would happen here. This is roughly how the conversation went:
Me: Wilfrid, I know that the markets have been very weak the last few weeks but the market is now finally just below where it was when you sold your stocks in 2016. I think this may be your chance to get in and I don’t think you should wait.
Wilfrid: I think the market is going to continue to go down as Covid cases keep going up.
Me: I think you’re making another mistake. I think you should at least scale back in a little at a time.
Wilfrid: I’m going to wait but thank you for calling.
In the next three days, the market was back up 20% from the bottom. Unfortunately, Wilfrid missed one of the great buying opportunities of his lifetime. So, getting back to the question of what the market may do if Trump is elected, my sense is that this possibility is already being priced in and the market seems to like the idea of him winning. I don’t think a Biden win would be bad for the market either simply because we have already had four years of a Biden Presidency so this would not be a “shock” for investors.
I’m intensely interested in the answers to the questions around the election and their effect on markets so on May 9th, I will be attending a one day conference hosted by Capital Group in Washington, D.C. where experts and portfolio managers will debate these issues. I’m looking forward to it and will report my findings to you when I return.
As always, if you have any questions, please don’t hesitate to reach out.