It was no secret who the global financial markets favoured over the last couple of months. News that the FBI was no longer investigating Clinton yesterday surged the markets with the expectation that the US would see a Clinton victory. If you watched American election coverage last night, you may have noticed the periodic reports of global turmoil in financial markets as it appeared more and more likely that a Trump victory was imminent. But why do the markets fear a Donald Trump presidency? Simply put, markets don’t like not knowing the future. Where there is uncertainty, there is volatility. Donald Trump has been known as a wild card with no political history on which to base future economic predictions.
We have a lot of uncertainties about the US economic future. What does that mean for us as Canadians who have money in our RRSPs, TFSAs, pensions and other savings invested in financial markets?
A Brief History of Markets and Elections:
History has shown time and time again that markets have a short memory and don’t act based on which party holds office, but rather on seeing economic growth. There were a few themes to Donald Trump’s campaign and many of them involved infrastructure spending, revisiting trade agreements, tax cuts, stimulus spending and other promises that could have a positive impact on the markets. Today’s initial reaction should not be seen as an indicator of the next 4 years of market performance.
What is going to happen – Canadian and Foreign Content fluctuations:
As is normal, Canadian markets often follow our American neighbours. A positive outlook going into 2017 has turned somewhat uncertain as we wait and see what a Trump government means to America’s relationship with other countries. The short term expectation is to expect volatility. America’s influence on global economics will be seen in all world markets for the short term. If you have investments, in the next few months you will see your portfolio have inconsistent increases and decreases – and I don’t want that to alarm you. Where volatility exists, so does opportunity.
What to do about this – Maintain a Long Term Outlook:
It is important to remember that the money you have in the domestic and foreign stock markets should have been put there with a long term focus. If you recall Brexit earlier this year, the results of that shocking vote only affected world markets for a very short time and this vote is expected to have a similar impact. Again, times of great volatility offer us great opportunities. One of those opportunities is to make mutual fund and stock purchases below normal prices. This is a good time to invest!
Game Plan – Managing Portfolios in Volatile Markets:
Where there is volatility, there is opportunity. As we see ups and downs in the markets, we can use these ups and downs as an opportunity to position your funds to purchase equity investments while they are temporarily low – buy low, sell high. This is the premise of Henry Markowitz’s Nobel Prize winning portfolio rebalancing strategy. It can add a few extra percentage points of return to your portfolio each year. Times of volatility offer that chance.
As Paul Harvey famously said, “In times like these, it’s helpful to remember there have always been times like these.” Although the initial shock and uncertainty of Donald Trump’s surprise victory will have a short term effect on the financial markets, it’s important to stay the course and stick to your personal plan.