November Market Letter: The Final Countdown

Brent Woyat - Nov 04, 2016

I always caution against watching stocks on a daily basis, because it’s too easy to get caught up in the daily volatility that inevitably will occur. If we go back to last summer’s late August swoon, it might have been tempting to bail when shares were near their bottom and financial reports bordered on hysteria.

Or, fast forward a few months to the start of 2016. Remember how stocks were hit by one worry after another? “The S&P 500 and Nasdaq posted their worst start to a year since 2001, while it was the worst for the Dow since 2008,” according to an early January headline by Reuters.

Anytime stock comparisons run up against 2001 or 2008, it’s natural to start asking questions. But it can also generate needless worry.

Monitoring daily moves in stocks may not always bring about volatility. Instead, it may be as exciting as watching the paint dry.

The S&P 500 Index closed at an all-time high 2,190 on August 15 (St. Louis Federal Reserve). It then preceded to close within 3% of the all-time high for the next 54-straight business days ending October 31 (St. Louis Federal Reserve). That’s the longest streak since 1928, according to LPL Research.

The sheer boredom in this broad-based index of 500 larger companies contrasts sharply with the circus that has unfolded, the 2016 presidential election.

Charges and counter charges have been levied by the candidates. Reality TV couldn’t have done a better job scripting the antics in this campaign. Sadly, however, this isn’t reality TV. It’s an election that will decide who will be the nation’s commander-in-chief for the next four years.

Unless the collective wisdom of investors believes the election will have a material impact on the economy, the lack of market reaction really shouldn’t come as a surprise.

There are some who would say that a come-from-behind win by Donald Trump might spook the market because a win by his opponent, Hillary Clinton, is supposedly priced into shares.

That may or may not be the case. A Trump win might produce a “Brexit-like reaction.” You may recall the sharp two-day selloff in shares following the U.K.’s referendum to leave the European Union in June. A ‘yes’ on Brexit wasn’t supposed to happen while the ‘yes’ vote suddenly injected a large dose of uncertainty into the market.

But the bottom didn’t fallout of the UK or the EU economy. There weren’t any post-referendum economic tremors to reach our shores either. Within about one month, the major indices in the U.S. were posting new highs.

I can’t say that the U.S. market will surge to new highs after the election. No one can predict where shares might go in a two or three-week period and do it consistently. But let’s step back a moment and take things into perspective.

Short-term market gyrations are the playground of traders. Long-term investors with long-term plans shouldn’t be distracted by daily movements.

Eventually, longer-term money will eventually set its sights on the boring fundamentals that have tugged at shares for many years – the economy, profits and expectations of profit growth, and Federal Reserve policy.

I typically recommend a well-diversified portfolio that’s invested in the major sectors of the U.S. and Canadian economies. It’s a way to increase diversification, reduce long-term risk, and participate in gains that emerge outside of the Canadian market that we are likely to see over a long period.

I know that for some of you, this year’s election has been particularly difficult. People on both sides of the border are rightly concerned about the direction of the largest economy in the world, and fear that the U.S. leadership that will take the helm next year won’t be in the country’s best interest.

In his 2015 letter to shareholders, Warren Buffett said, “For 240 years it's been a terrible mistake to bet against America, and now is no time to start. America's golden goose of commerce and innovation will continue to lay more and larger eggs (Bloomberg – Warren Buffett’s 2015 Shareholder letter, Annotated).”

A growing economy fueled by innovation and entrepreneurship has been the biggest driver of stocks over the many decades. As Buffett emphasized, betting against America isn’t a winning hand. And he didn’t qualify his remarks based on the outcome of the upcoming election.