NEW YORK, N.Y. – Voters chose to shake up Washington and bring big change to the White House. Resist doing the same with your 401(k), analysts and fund managers say.
The first reaction for many investors around the world was to sell — nearly everything — late Tuesday as it became clear that Donald Trump would win the presidency. Stock markets tanked from Asia to Europe, and a similarly steep drop seemed likely when U.S. markets opened.
But stocks proved resilient Wednesday morning, benefiting those who sat on their hands instead of selling immediately. The market likely won’t stay this calm in the next few days and weeks. Analysts are forecasting big swings as investors digest the surprising election result, but their advice for investors remains: Stay the course. Elections can mean big short-term swings for stocks and other investments, but they historically have had minimal impact over the long term.
Here’s a look at what experts say to expect:
WHAT’S GOING TO HAPPEN TO THE MARKET?
The answer is that no one knows. Not even the market knows. Late Tuesday, the futures market — where investors place bets on where stock indexes will end up — was calling for a drop of at least 5 per cent for the widely followed Standard & Poor’s 500 index. By Wednesday afternoon, the S&P 500 was up more than 1 per cent.
History has shown that a presidential election doesn’t singlehandedly alter the stock market over the long term. Other factors, such as how expensive stocks are relative to their earnings and what the Federal Reserve is doing with interest rates, are more important factors than who sits in the White House.
Dating back to 1853, the average annual return for stocks under Republican presidents has been 11 per cent — precisely the same as for Democratic administrations, according to the investment strategy group at Vanguard. The U.S. president may be the leader of the free world, but even that much power doesn’t allow for singlehanded control of the economy or interest rates.
WHY SO MUCH CONCERN ABOUT A TRUMP PRESIDENCY?
Because no one knows what kinds of policies a President Trump would enact. One worry is that his election could lead to a global trade war, which would drag down profits for big U.S. companies that increasingly depend on customers in China, Europe and elsewhere.
He also represents uncertainty, one of the biggest bugaboos for markets. Will he convince Congress to overturn the North American Free Trade Agreement? Will there be a mass deportation of immigrants, one that would leave employers with a big hole to fill? How much will the U.S. debt rise if President Trump increases infrastructure spending and cuts taxes? Wall Street doesn’t have a good read on these questions, among others, and uncertainty often leads to anxiety for markets.
ARE OTHER PEOPLE FREAKING OUT?
More customers than usual at Fidelity are calling in to ask what they should do, but only a few more. The call volume is about the same as a typical Tuesday after a three-day weekend, Fidelity says.
One measure of investor fear — an index that measures how much traders are paying to buy insurance against future drops in the S&P 500 — actually dropped 20 per cent Wednesday.
WHAT SHOULD I BE PREPARING FOR?
More swings in the market.
Don’t be surprised to see stocks follow up their gains on Wednesday with losses on Thursday or thereafter, as investors further digest the ramifications of a Trump presidency. And don’t be surprised if they just turn around and climb higher again the next day. Because of how much uncertainty exists about what a President Trump would do, investors have a lot of room to overreact.
“Volatility is the result of people getting excited about news and reacting emotionally, getting nervous and reacting negatively, and then around again,” says Colin Moore, global chief investment officer at Columbia Threedneedle Investments.
Consider the U.K. vote this summer to leave the European Union, another election result that caught markets by surprise. Stocks around the world plunged in the immediate aftermath, only to roar back within a couple weeks.
Following Trump’s victory, Moore expects to see volatility continue over the next six to eight weeks.
WHAT SHOULD I DO WITH MY 401(K)?
Try to do nothing, even if the market starts to swing sharply, experts say.
Stocks are long-term investments, meant to be held for many years. Big swings in the interim are normal and should be expected. That higher volatility is the price that investors pay in exchange for the higher returns that stocks have historically provided over bonds and other investments.
If you’re feeling nervous, maybe the underlying problem is that your portfolio has too much in stocks, says John Sweeney, executive vice-president of retirement and investing strategies for Fidelity. If you haven’t checked your 401(k) much the past few years, you likely have more in stock than you used to.
The largest stock mutual fund has returned 183 per cent since the start of 2009, for example, far outpacing the 37 per cent return for the largest bond fund. So, unless you’ve been rebalancing your portfolio regularly, you may have a much bigger percentage apportioned to stocks than before. And as investors get closer to retirement age, experts suggest paring back on stocks and devoting more of their portfolios to bonds.
“If this news event has caused you some anxiety,” Sweeney says, “use this as an opportunity to rebalance.”