Market pundits often react to market action, seemingly providing schizophrenic predictions of future market returns. Since Election Day when Donald Trump became our President Elect, the pundits have been out in force, often describing a world that is more of a reaction to their own political leanings rather than sound economic, political, and social analysis and its impact on the markets. Since Election Day, the S&P 500 Index is up over 9%. This after the same index dropped in excess of 5% at midnight of Election Day after Donald Trump was predicted to be the winner of the Presidential Election.
Much has also been written of the market’s expectation for President Trump’s policies, especially as the Republicans control both the House and Senate. The market seems to believe that the US stock market will be bolstered by further fiscal stimulus, looser financial regulations, stiffer trade regulations, repeal of Obamacare, and a long list of other policies. In the light of all of this, the US equity markets have handedly outpaced foreign markets since Election Day. Developed Market Equities are up almost 5%, while Emerging Markets Equities are up only 1% since Election Day.
The Federal Reserve has come out with more hawkish comments post the election, citing the expectation of fiscal stimulus and the pre-existing signs of a stronger economy, such as low unemployment, wage pressures, and finally signs of prices increasing.
It’s often noted that typical investors only obtain 60% to 70% of the long term US equity market return. This is largely due to behavioral mistakes that investors seem to make, especially during these types of volatile markets. Over the long term, the most successful investors tend to minimize these mistakes, instead focusing on their long term strategic plan. The two most common types of behavioral mistakes are risk aversion/seeking and recency.
Risk aversion and risk seeking are mistakes often found with investors who do not follow their long term asset allocation and savings plan. Their fear or greed leads them to stray from their plan, often leading to wild changes in their portfolios. Risk averse investors can find themselves lagging the market, then all of a sudden chasing the market. Risk seeking investors can get scared out of the market after a dramatic sell off, leading to the possibility of missing “the bounce.”
Investors sometimes put too much weight on recent events, which is called the recency effect. They overweight recent market returns, leading to a herding effect. Think about the housing bubble that ended in 2008, leading to “flippers” scrambling to find an exit. They were basing their judgement on the expectation that recent price appreciation will continue, allowing them to find the next “fool.”
We, at Multnomah Group, would like to remind our clients that the best path to long term investment success is to focus on your strategic plan. Do not be too easily swayed by what you read today. Fear and greed always seem to come back to haunt your long term returns.