Most market experts agree that a Donald Trump victory on Election Day
would not be welcome. Macroeconomic Advisers recently warned that a
Trump win would trigger a 7% drop in the S&P 500 (^GSPC), wiping out over $1 trillion in investor wealth.
At the heart of these calls is the argument that Trump has been pushing
unfavorable economic policies and would exacerbate uncertainty in an
already jittery market. This is why Citi’s Tobias Levkovich sees a Trump win leading to a 3-5% decline. Elsewhere, JPMorgan’s Mislav Matejka warns that a Trump victory-related sell-off would not be quickly followed by a rebound.
But there is a glass-half-full way of thinking about this, and it’s great for stock market investors.
“When Trump is at inauguration … and you’re scared to death … that’s probably a buying opportunity,” DoubleLine Funds’ Jeffrey Gundlach said in June.
Indeed, bold and patient investors are likely to be thrilled by the prospect of buying stocks at a huge discount.
‘Be greedy when others are fearful’
It’s a counterintuitive way to think, but some of history’s most successful investors have made fortunes on it.
“One of the lessons I learned over the past 24 years as a research analyst (first job was Kidder Peabody), is the best investment decisions are ‘uncomfortable,’” FundStrat’s Tom Lee said in a note to clients earlier this year.
“Be greedy when others are fearful, and be fearful when others are greedy,” Warren Buffett says.
Buffett has been encouraging this type of thinking for a while. In fact, he wrote about it after one of the worst stock-market sell-offs in history.
“I can’t predict the short-term movements of the stock market,” Buffett said in a New York Times op-ed dated Oct. 16, 2008.
“I haven’t the faintest idea as to whether stocks will be higher or
lower a month — or a year — from now. What is likely, however, is that
the market will move higher, perhaps substantially so, well before
either sentiment or the economy turns up. So if you wait for the robins,
spring will be over.”
View photos
History is riddled with tough times. And yet the stock market has
figured out a way to reward investors. (Image: JPMorgan Asset
Management)
Indeed, sell-offs triggered by bad news has always proven to be a buying opportunity.
“In the 20th century, the United States endured two world wars and
other traumatic and expensive military conflicts; the Depression; a
dozen or so recessions and financial panics; oil shocks; a flu epidemic;
and the resignation of a disgraced president,” he added. “Yet the Dow
rose from 66 to 11,497.”
The fundamental case for buying a President Trump sell-off
Buffett’s argument for the long term is time-tested, and fits well for folks who can wait years for things to turn around.
But there are also plenty of bullish forces that could kick in should the unexpected happen.
“[W]e don’t think the knock to U.S. equities would last long if
[Hillary Clinton’s] rival were to emerge victorious,” Capital Economics’
Simon MacAdam said.
He explained: “A Trump presidency would presumably mean monetary policy
staying looser for longer, which would be positive for the stock
market, all else equal. What’s more, we think the accompanying narrowing
of interest rate differentials with other economies, in conjunction
with capital outflows into safe-haven currencies such as the Swiss franc
and Japanese yen, should see the U.S. currency weaken against other
‘majors,’ thereby providing further uplift to U.S. equities by boosting
the dollar value of overseas earnings.”
Loose monetary policy and a weak dollar have been around for much of
the current bull market, so more of the same could prove to be a good
thing.
No matter who wins, there’s likely to be an uncertainty premium keeping
stock prices from going as high as they could. But such is the nature of investing: It’s hard. There’s always something.
“While this malaise is unfortunate, this too shall pass,” BMO Capital’s Brian Belski said on Friday. “Unfortunately, elevated investor angst is unlikely to magically evaporate completely after Nov. 8, 2016.”
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