Post-Election Advice for Your Plan by John NowakSubmitted by Moller Financial Services on November 9th, 2016
The race between the two most unfavorable presidential candidates in decades ended with a huge surprise, perhaps the biggest in election history. If there are any lessons learned (or reinforced) from this election, it is that even expert predictions and forecasts can be wrong. I expect many people on the internet/tv/radio will craftily and elegantly say what this means for the future of our country and the markets. Have they not learned anything? Reading into the election and extrapolating into the future – either fearful or hopeful for change – is not a good use of your valuable time.
For example, let’s look at Nate Silver’s FiveThirtyEight blog. Before moving into politics, Silver helped create a baseball player statistical forecasting system, called PECOTA, which is widely used today. In 2008, Silver took his analytic skills to politics and accurately predicted 49 of 50 state elections. In 2012, he nailed it – 50 for 50 state elections predicted. 2016 was different. Just hours before the election, FiveThirtyEight predicted had Clinton had a 71% chance of winning (77% for Pennsylvania) and getting over 300 Electoral College votes. Even the greatest forecaster cannot accurately predict an election on the same day. Why do some think their own or some other analyst’s predictions will come true?
In 1948, Thomas Dewey was largely expected to defeat Harry Truman for the presidency. Dewey was ahead 50% to 44% (with 6% allocated towards other candidates). The Chicago Tribune famously proclaimed “Dewey Defeats Truman.” The unexpected happened. Truman won 50% to 45% (with 5% allocated to other candidates). With this surprise, the stock market (S&P Composite) declined almost 6% that month and continued to decline another 8% over the next seven months. After that initial shock, the stock market would grow 73% until the next election in 1952.
One of our favorite investing quotes is “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” – Benjamin Graham (famous economist, legendary investor, Warren Buffett mentor). In other words, profitable companies provide value to investors over the long-term, but in the short-term stock prices are driven by emotions. We would not be surprised if there were big swings up and down as the market digests the surprising results of the election. Overnight, U.S. stock prices declined 5% only to fully recover by mid-morning. We expect that some investors will overreact based on emotions and not with a disciplined plan. This emotion-driven behavior is harmful to portfolios in the long-term.
History has shown (and we have consistently said) that while the 2016 presidential candidates were considered the two most unfavorable in over 30 years, Republican and Democrat presidencies have experienced similar positive long-term returns for stocks. While these election results were a surprise, our advice is not. There will be unforeseen events in the future, just as there have been in the past. Following a disciplined investment and financial plan is the time-tested way to build and preserve wealth in the long-term. We are here to help you along the way.
So, to reuse our advice from post-Brexit, Keep Calm and Carry On. If you would like to speak with us about your plan, please give us a call.