The Election is Almost Over – Now What?

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President-elect Donald Trump. It still sounds strange. It was an outcome that very few people saw coming. Some may have thought it was a possibility, but I’m sure even his most die-hard supporters didn’t go into the election very confident of a victory.

So here we are, Donald Trump is now our 45th U.S. President.  In this article I would like to avoid the mine fields of talking about the political, social and personal feelings people may have surrounding the election, but rather focus on the potential effects it may have on the economy and your investments.

The bigger surprise may not have been Trump’s victory, but rather the stock market’s reaction to it. The prediction was that if Trump won, the market would take a dive. But instead, we have seen a big rally, leading to new all-time highs. This leads some to feel that Wall Street may have been funding Clinton’s campaign, while secretly hoping for a Trump victory.

It appears that Wall Street is placing a bet that Congress will choose to tackle some meaningful economic issues that may finally help jump start the economy.

One of the main outcomes of this election is that we do not have a divided government at this point, at least not for the next two years.  Republicans now control all three branches of government. But as the old saying goes, be careful what you ask for – because the ball is now in their court.

This will put a lot of pressure on Republican lawmakers to actually pass some meaningful bills over the next two years that will help the economy move forward at a more meaningful pace. If not, they will likely lose control in two years at the next mid-term elections, similar to what happened to the Democrats in 2010 when they controlled all three branches.

Again, this may help explain Wall Street’s positive reaction to the Trump victory. If over the course of the next year we see the legislature pass some bills aimed at helping the economy, it could quickly change investors’ longer-term sentiment to a more positive outlook. And as we have discussed here several times, optimism is one of the key ingredients necessary for a sustainable growing economy and stock market.

Interestingly, there are some strong psychological forces that affect investor sentiment as well. Every human being has some kind of bias that skews their point of view. Investors are known for putting too much weight on events they believe will impact the market one way or another. The fact is, events don’t impact the market; the market is impacted by your reaction to an event and in turn, how you believe that event will impact the market.

People view issues differently, based on whether or not the governing party in place shares their beliefs. As an example, a Pew Research Center Report showed that under Presidents Obama and Bill Clinton, fewer than half of Democrats thought reducing the deficit was a top priority. But under George W. Bush, that number jumped to over two thirds. Republicans, as you would expect, had the exact opposite reaction.

It’s been scientifically proven that investors are willing to take more risk when their political party is in power. In the study, Political Climate, Optimism, and Investment Decisions, it shows that investors believe risk will be lower and returns will be higher when their political party is in power. This misinterpretation of reality may lead investors to take more risk in their portfolios than they should, ultimately putting their financial future on the line.

So What’s the Take Away?

First, take a deep breath. Situations are rarely as good or as bad as they first appear, they are usually somewhere in-between. Whether you are cheering or mourning the election results, it’s in your best financial interest to temper your emotions and focus on the long-term goals for your investments. Doing so will typically allow you to avoid making significant investment mistakes based upon emotion.

That is one of the many reasons that we stress the importance of establishing a financial plan. If you do not currently have a financial plan in place, we invite you to contact our office and meet with one of our advisors.