November

9, 2016 Election Update

What Does Trump’s Stunning Upset Mean for Your Portfolio?


I have been thinking about the possibility of a Trump electoral surprise ever since Josh and
I made a bet about the election outcome a month ago; it was really a game theory exercise,
as it appeared Hillary Clinton would easily win the electoral college (at least prior to the
Comey email surprise).

I lost the bet.

Pundits and the media will discuss the political ramifications of this upset endlessly. I want
to shift your focus this morning to our actual expertise: economic and market implications
of the Trump victory.

We have the proverbial good news and bad news. I’ll save you some suspense and say that
on balance, it is less significant to your portfolio than you probably imagine; however, there
are still surprises to come, along with increased volatility and a bumpy ride for a few days
or weeks.

Let’s start with the negative: The bad news is we really have no idea what sort of policies a
Trump Administration will enact. The word “uncertainty” is overused, serving as a lazy
crutch among analysts, but in this case, we really are staring at a blank slate. Can he claim a
mandate? How much will Congress act as a check on his legislative goals? How many of the
harshest statements (building a wall, banning Muslims, etc.) were just overheated
campaign rhetoric? We do not yet know.

We have a high level of uncertainty about policy changes that may be coming: immigration,
trade, Federal Reserve, fiscal stimulus, military spending, Supreme Court, health care,
deregulation, international relations, and climate change.

As results began to trickle in and Hillary Clinton’s “firewall” began to crumple, futures sold
off and overseas markets reacted. Overnight trading was deeply negative, as Asia sold off
by almost 5 percent; around midnight, U.S. Futures were off by 800 points. Gold rallied
strongly. However, that emotional knee jerk reaction was a bit of an over-reaction. Markets
have pared their losses; as I write this long before sunrise, U.S. equity futures are down a
quarter of that.


There should be no doubt that increased market volatility will be the short-term result.
However, that is not likely to be the lasting result.

There are several Trump policies that will likely be implemented:

1. Significant Tax cuts (Corporate and Individual)
2. Infrastructure build out
3. Higher deficit spending

The tax cuts and deficits are similar to the George W. Bush economic plan, but at a very
different phase of the economic cycle. Bush took office as the dot com collapse was
occurring; Trump will be sworn in eight years after the financial crisis.

Now for the positive: expect the initial market reaction to be temporary.

When we look at historical geopolitical events – genuine surprises such as the Pearl Harbor
attack, JFK assassination, Nixon Resignation, September 11th terror attacks, and S&P
downgrading America’s debt rating in 2011 – there is a very specific pattern that plays out
over and over.

Markets wobble: Traders react emotionally. First there is a panicked sell off, followed by a
rally to not quite as high a level as where the sell off began, minor waves and counter-
reactions. Then cooler heads prevail, and the market returns to whatever it was doing prior
to the surprise event.

Described technically, we see three stages: reaction, counter-reaction, resumption of prior
trend.

Markets were already selling off prior to 9/11; after the wobble, they resumed that
downtrend. The pattern held true after the Pearl Harbor attack – it came in the midst of a
sell off, with stocks already down 30% from their 1938 highs. They fell another 20% before
bottoming the next year. Markets were in a clear uptrend prior to the Kennedy
assassination (wobble, then back to rally). Nixon’s resignation too: Markets had peaked in
early 1973 and were already off 31% from the highs by the time Tricky Dick resigned; they
then fell another 22% before making a post crash low.

All followed the same pattern: Reaction, counter-reaction, resumption of trend.

Which leads me to the good news. We have been in a long bull market which, depending
upon your views, dates back to either the March 2009 lows or the breakout above the 2007
levels in 2013. The economy is expanding, wages are finally rising, unemployment is under
5%, and corporate earnings are still going higher.

November 9, 2016
My focus has been on the economic and market impact of political events, but I would be
remiss if I didn’t mention the possible setbacks to social progress made over the past eight
years. Several of you expressed concern about this in emails last night; my suggestion is to
think about how you might use your Trump tax cut windfall to follow your conscience in
promoting the issues you care deeply about.

It is a staple of every presentation I give, and it was the very first column I wrote in 2011
for the Washington Post: “Politics and investing don't mix.”

That was never truer than it is today.


Barry Ritholtz
Chairman and CIO, Ritholtz Wealth Management

The content above is meant for the intended recipient only and is not meant to be reproduced or distributed for any reason. Nothing in this informational
commentary should be construed as a solicitation to buy or sell any securities. All data contained herein is believed to be reliable at the time of writing but should
not be relied upon as the basis for any independent decisions. All opinions expressed are the author's own and are subject to change at any time

November 9, 2016