The race to the White House is over, and whether you like the results or not, we can probably agree on one thing: There will be more turbulence.
That’s as true for politics and international trade as it is for the markets. Stocks initially jumped on expectations that President-elect Donald Trump will deregulate, reduce taxes and pursue business-friendly policies that lead to higher profits.
Interest rates on mid- and long-term U.S. government debt also popped up. This was ostensibly because of expectations that Trump’s policies will stimulate inflation, increase federal deficits and leave the U.S. more heavily in debt.
Higher interest rates, in turn, meant a decline in bond prices, which move in the opposite direction of rates.
Different markets, different reactions
Stocks and bonds reacted differently to Trump’s election likely because investors were looking at different time horizons for the two asset classes. Stock investors seem to be bullish based on shorter-term expectations, while bond investors are likely looking at the longer-term horizon.
More volatility can be expected
What can we expect going forward? We can’t predict the markets, but it’s reasonable to expect more volatility.
Headlines from pundits will likely be extreme and all over the map. We’re already getting a taste of this. Some bullish analysts forecast a continued stock market surge. On the other hand, there is no shortage of bears warning of runaway inflation and advising us to go to cash.
Further fuelling the turbulence will be the president-elect’s propensity for unpredictable and sensational statements and off-the-cuff announcements that sometimes surprise even his inner circle.
The range of pundit predictions will likely only widen. Investors can expect more headlines that prey on their emotions and fears.
What you can do
How can investors respond? At PWL, we always return to the fundamentals of long-term investment success.
First, it’s a good idea to have five years or more of spending secured in short-term high-quality bonds. If you feel you may not have this or your needs have changed, please get in touch to review your portfolio.
Now is also as good a time as any to rebalance your holdings to make sure they’re in line with your long-term targets. We advise periodically checking your allocations, especially when markets have moved significantly, as U.S. stocks have in the past year.
At PWL, we constantly watch clients’ portfolios and rebalance if they’ve gotten excessively overweight or underweight on any asset class.
Keep a disciplined long-term focus
Focusing with discipline on your investment plan can help you ignore the sensational financial headlines of the day. Take the drama with a grain of salt and don’t let it distract you from your goals.
Spicy news will come and go, but staying grounded and focussed on enduring goals will never go out of style.
