Many investors spend their time trying to predict what the markets are going to do next. During election season, though, it’s the markets that often do the predicting.
That didn’t seem to be the case this year, however, as stock index futures plunged once it became clear that Donald Trump was going to win the election. Late on election night, Dow futures—which indicate where the market will open the next trading day—briefly dropped 800 points. But by the time Hillary Clinton had conceded and Trump delivered his acceptance speech, those losses had been halved. By mid-morning Wednesday, the three major stock indexes were all up. And later that week, the Dow hit an all-time high.
Why So Much Volatility?
Sandra Stoutenburg, senior market analyst at InvesTech Research, says you typically see market gains ahead of an election when an incumbent party is expected to win. And stocks made substantial gains early last week as it appeared Clinton was regaining ground. “Hillary was much more of a known entity to the stock market,” says Certified Financial Planner Stacy Francis, CEO of Francis Financial in N.Y. “The market does not like uncertainty.”
In fact, over the past month, the Dow (or Dow Jones Industrial Average) closely tracked Clinton’s trajectory: As her poll numbers increased, it often did, too. (The chart below shows how movements in the Dow tracked against her likelihood of winning, based on projections by economist and statistician Nate Silver, running up to the election.)
Election night demonstrated how uncertainty can trigger volatility in the market. As Trump showed surprising strength in key battleground states like Florida and Ohio, stock futures began to tumble. Francis likens it to “Brexit,” when the United Kingdom voted to leave the European Union, an unexpected decision that sent stocks plunging the day after, though they have since recovered, too.
What Does This Mean For Investors?
It’s a good reminder that investors’ perceptions of events can severely affect the market in the short term.
That’s one reason why, rather than reacting to day-to-day headlines and market movements, advisors emphasize that it’s important to stay focused on your investing goals and stick with your long-term strategy. “If you can just keep your seatbelt on, your portfolio will continue to flourish as long as it’s diversified appropriately, according to your risk tolerance and goals,” says Francis.
In the meantime, she says, long-term investors can take advantage of the volatility and act on any buying opportunities during dips, provided you have extra cash on hand earmarked for long-term goals. (In fact, after dropping initially, the Dow reached new all-time highs in the days after the election.) “There is always a silver lining to the chaos,” she adds.
November 9, 2016