The unthinkable appears to be happening. Barring some unexpected change to the way things are trending, we will wake up to a President-elect Donald Trump. This has some profound implications for markets, and so many people have asked me what to do on Facebook I’ve decided to post this late last night.
What’s Going to Happen with the Stock Market
Dow Jones futures imply an opening somewhere around a 700 point drop as of 11pm central time. If that drop stuck, that would be the largest decline since 9/11 I think. International stock markets, particularly emerging markets (sniff) will probably decline even more, hurting my personal portfolio as I have a large emerging market overweight.
Still, I didn’t weight emerging markets heavily to do a short term trade. I believe there is tremendous value in emerging markets long term, and that’s why I have the overweight. When the markets open tomorrow, emerging markets will tumble probably by at least 5% if not close to 10%. The declines will be horrific for US stocks, they’ll be unthinkable for international stocks.
Why is Wall Street Vomiting All Over Itself
Trump is calling for a massive decline in immigration and trade. Immigration and free trade are fantastic for the economy, and that’s a big reason why stock market futures are falling. Large American corporations like Coca Cola and Ford desperately need free trade agreements. The value of their discounted future profits just took a huge tumble, and that’s why the value of their stock prices are falling.
Also, the rest of the world will be less willing to do business with America as a result of this election. The economic impact of America withdrawing economically from the free trade progress of the past several decades is crushing the stock market.
What’s Going to Happen with the Bond Market
There is going to be a massive flight to quality tomorrow morning. Treasury bonds will rally like crazy, and yields will hit new lows. If you have been thinking about getting a mortgage because you’re worried about rising rates, you probably can wait a few more months.
So if you have a sizable bond allocation, congrats. You’re going to make a lot of money tomorrow.
Potential Investment Implications for All of This
A lot of people have asked, so I’m going to hazard my guess as to what will happen with markets. This could be totally wrong with the benefit of hindsight, but it’s always fun to throw out an educated guess so here I go. I’m expecting the Dow drops as much as 1,000 points tomorrow. We could even approach a 10% selloff on the stock market, which would mean a 1,500 point drop.
Like I mentioned, I expect international stocks and emerging markets to fall even more than that. Clearly, the price of buying in the stock market will be a heck of lot lower tomorrow morning. So the question is: should you buy or sell?
I believe that’s the wrong question. Stocks over the long term inevitably increase in price. If you were thinking about investing yesterday or today, then tomorrow will be a tremendous time to invest (apologize for the word choice). If you can buy international stocks at a 10% lower price than today, why wouldn’t you do that if your time horizon is 10 years or longer?
I have to give a disclaimer that I’m not a licensed investment professional and none of this should be considered advice. That said, don’t try to outsmart this. Don’t try to time the market. When the market opens and drops like a rock, don’t try to go for the short term trade. You’ll get burned. If you haven’t made your IRA contribution for the year yet or you have a bunch of money you’ve been thinking about putting into the stock market, just freaking do it.
I like using three funds at Vanguard. The Total US Stock Market Index Fund, Total International Stock Market Index Fund, and the Emerging Markets Index Fund would be excellent choices. The ETF ticker symbols for those are VTI, VXUS, and VWO. If you wanted to be aggressive, I’d buy international stocks which would be VXUS and VWO. If you just want to invest in US companies, then that would be VTI. All of them have tiny expense ratios.
No Matter Your Political Views, The World Will Either Keep Turning or Blow Up. No Use Worrying About It
Secretary Clinton ran a bunch of ads in this campaign trying to use the same playbook LBJ used against Goldwater in ’64. LBJ successfully played on voters’ fears of world annihilation from nuclear weapons after Goldwater made some cavalier comments about use of nuclear bombs in the field of battle.
A lot of people will point at the huge decline in the stock market tomorrow and say, “the world is ending I’m not going to invest.” I have news for those folks. If the world ends, your money will be worthless. If the world comes close to ending and the economic apocalypse happens, the only assets that will matter are guns and survival skills.
Why worry about your stock portfolio if this happens? That worry will be pointless. But what if it doesn’t happen? What if the country enters a recession or it merely chugs along and somehow survives until 2020, at which point we elect someone more stable? The stock market will grow and even prosper compared to tomorrow’s levels if that happens.
So if you were going to invest anyway, do it tomorrow and don’t worry about timing the bottom. If you have an IRA or 401k, don’t look at your account tomorrow. Whatever you do, do not sell. You’ll cost yourself a lot of money over the long term. Here’s to wishing everyone the best after the end to an abysmal election season, no matter who you supported.