The US election is looming and uncertainty and volatility are the overriding sentiments impacting financial markets in the final days pre-election.
At the time of writing the NZ sharemarket has fallen over 11% from its all-time high on September 7. This correction is not entirely unexpected after a very strong run, with increasing global interest rates making high yielding NZ equities now look a little less attractive. However, even with this decline, the NZ sharemarket (as measured by the NZSE 50 Index) is still up 6% for the calendar year, and over 10% for the last 12 months.
Global equity markets have also retreated over recent weeks – the US and Australian markets are down 5% and 7% respectively from their peaks earlier in the year. A common factor is jitters over the implications of a possible Trump victory in next week’s US election. While still unlikely, a Trump victory – with his anti-free trade views and combustible personality – is likely to throw markets into further turmoil, at least in the short term. On the other hand, the more likely Clinton victory would probably be favourably received by markets.
These recent developments highlight a couple of things.
Firstly, equity markets are highly volatile! They react, and often over-react, to current events, news items, investor emotions, and supply and demand. Equity markets often go down (despite a great run over the last 6-7 years), but invariably bounce back. The long-term trend is positive as the economy and corporate earnings grow over time.
Secondly it’s very difficult, and usually counter-productive, to try to “time” the market. As an investor you may hold a view that a market is under or over-valued, but trying to accurately predict when the market will turn is nigh on impossible and will often lead to an investor buying or selling too late or too soon, and also missing out on big gains during periods when s/he is out of the market.
Back to Clinton v Trump … with the circus that is the US election finally drawing to a close, what is likely to happen to financial markets?
There is considerable speculation on this subject amongst commentators. Mostly the views support a Clinton victory being positive for markets, with Clinton seen as a capable and experienced (albeit not likeable) president-in-waiting, and largely representing a continuation of the Obama regime. A Clinton victory is generally considered to be priced-in to the market, albeit discounted somewhat for a Trump upset.
On the other hand, a Trump win (considered unlikely) could cause chaos. Markets dislike uncertainty, and Trump’s inconsistent policy positions seem likely to lead to further short term market uncertainty, if elected. Some commentators have gone so far as to predict a global recession and stock market collapses in the event of a Trump victory. This may or may not come to pass (my view is less pessimistic), but at the least we should expect considerable market volatility if Trump is elected.
My advice is to stay invested, sit back and enjoy (if you can!) the ups and downs that are likely over coming weeks. Be prepared to hang in there for the long term. Even if markets fall, they will come right – they always do.