How to profit from election volatility
The best advice for how to respond to post-Election stock market volatility is to ignore it.
That at least is the consensus of the two hundred investment advisers I monitor on a regular basis.
Many on Wednesday pointed out that the stock market’s short-term direction is largely unpredictable even in normal circumstances, much less in the wake of unexpected events like Donald Trump’s upset victory over Hillary Clinton. Those who try to profit from the market’s gyrations might as well bet on the lottery.
For example, you almost certainly wouldn’t have made any money on Wednesday even if you knew in advance that Trump would win. Since the nearly universal belief was that the stock market would plunge in that event, you could have sold stocks “short” on Tuesday afternoon—thereby aggressively betting on such a decline. And, for a while in the early hours on Wednesday, when the Dow Jones industrial average was down nearly 800 points, your bet would have been profitable—on paper.
You would have needed rare prescience to take that profit to the bank, however. Almost without warning, the stock market reversed itself, and closed up 256 points, near an all-time high.
You would have been even worse off if, like almost all of the pundits, you were expecting a Clinton victory and only placed your bearish bets after it became clear that Trump would win. In that event you wouldn’t have shorted the stock market until the Dow was already deep into negative territory. You therefore placed your bearish bet at nearly the worst possible time and are now sitting on huge losses.
Summarizing what this extraordinary 1000+ point Dow swing in just a few hours’ time means for short-term market timers this week, Barry Rosen, editor of the Fortucast Market Timing service, concluded that “normal trading” is “completely out of the question.” Philip Milachek, editor of the Focused Growth Investor advisory service, adds: “Timing short term corrections is extremely difficult.”
Milachek advises clients to focus instead on the long-term.
That is easier said than done, of course, but maintaining a historical perspective can nevertheless help us do so, according to Jim Lowell, editor of the Fidelity Investor advisory service. He reminds us of how the stock market reacted the last time the incumbent political party lost the White House after occupying it for 8 years. That was in 2008, when now-President Barack Obama defeated John McCain; the stock market promptly plunged more than 5%.
“That was a bad day, but consider how far we’ve come since then,” Lowell wrote to clients. The Dow today is 9,000 points higher than where it stood then.
Additional solace that can help us stay the course comes from an analysis of what truly influences the stock market over the long term. Jon Markman, editor of the Strategic Advantage advisory service, reports that “Politics just doesn’t matter that much to markets. Interest rates, inflation and corporate earnings growth are a lot more important.”
In a similar vein, Andy Cross, Chief Investment Officer for the Motley Fool, adds that our focus today, after the election, should be no different than what it was before: Searching for “businesses that create value for customers, employees, partners and shareholders” over periods measured in “years, not days or months.”
With their longer-term perspectives, both Markman and Cross are upbeat. Markman reminds clients that “there are great developments to look forward to…, including autonomous vehicles, advances in artificial intelligence and biotechnology, and the mission to Mars.”
Cross adds that our job is to “keep investing for the future, with optimism.”
Mark Hulbert, founder of the Hulbert Financial Digest, has been tracking investment advisers' performances for four decades. For more information, email him at mark@hulbertratings.com or go to www.hulbertratings.com .