Icarus and Hubris: A Key Lesson from the Election

Regardless what side of the political spectrum you fall on, most can agree that the way the markets moved before, during, and after the night of the Presidential election didn’t quite add up.  I am frequently reminding my clients that the markets do not like uncertainty or surprises; a Donald Trump win threatened to offer plenty of both.

The days leading up to the election seemed to tell us the markets preferred a Hillary Clinton win.  They fell 9 days in a row as the FBI investigation into Clinton’s email server was reopened and her polling numbers dropped.  Then, on Monday November 7, the Dow rallied almost 400 points when the FBI once again cleared her in their investigation.  This is a logical market reaction given that Clinton represented the status quo — that is, she represented certainty for the markets.

The markets began to plummet the night of the election as a Trump win went from unlikely, to likely, and then to imminent.  At one point late in the evening of November 8, the Dow futures market was down over 700 points.  The S&P 500 futures dropped so far that trading was halted at 11:55PM because the 5% loss limit was hit.  International stock markets were taking an equally terrible drubbing with Japan’s Nikkei losing 5.4% and Hong Kong’s Hang Seng down 3.2%.

Where the logic breaks down is what happened after it became clear that Trump was going to win the Presidential election.  The Dow futures recovered most of its losses before the markets opened at 9:30AM EST on Wednesday, November 9.  The actual Dow Jones Industrial Average opened only 15 points lower than it had closed the afternoon before and it managed to finish the day up 272 points over the prior close.  The Dow continued its climb over the following days with Thursday and Friday yielding even higher closing numbers.

If the markets were telling us they would react favorably to a Clinton win and the polls were telling us a Trump win would be a large surprise, then how do we explain the fact that the markets have strung together a series of winning days since his election, with the Dow reaching a new all-time high?  I’ve had many clients, family, and friends ask me this over the past two weeks.  I could speculate on what major factors made the markets move counter to what was logical at the time, but the better answer is far simpler; trying to predict the stock market in the short term is a big mistake!  No one throughout history has been able to reliably predict short term market movements. Fortunately, you don’t need to be able to predict the market to make money investing. All you need is patience and discipline.

This is another great example of why you should never make a change to your investments based on what you think the markets are going to do in the short term.   No one is smarter than the markets, and just as hubris cost Icarus his life in the Greek myth of the same name, hubris may very well cost you your financial life if you try to out-think the markets.

Paul Coleman III, CFP®


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