On Nov. 8, voters across the U.S. showed they want political change, electing Donald Trump and Republican majorities in both the House and the Senate. Stocks initially reacted negatively to the surprise election results because the polls were wrong and due to the policy uncertainty ahead. Declines were largest in Asian markets, which were open when election results were first announced. However, declines were smaller in most European markets, as investors began to refocus on the fundamentals, which remain broadly positive, and U.S. stocks have fluctuated between gains and losses in early trading. While we expect policies to change, don't change your investment strategy in response -- an appropriate mix of stocks and bonds will help you navigate the changes ahead.
In his victory comments, President-elect Trump highlighted infrastructure spending, putting millions to work rebuilding America. Higher government spending is likely to boost short-term economic growth, which is generally good news for stocks. But it will take time for any policies to be implemented. And much of the short-term uncertainty comes from no one knowing which of the other campaign comments and proposals will be implemented. Although the president has many powers, stock and bond prices are closely tied to fundamentals that won't change quickly. So instead of speculating about what might happen, stay focused on the longer-term trends, most of them positive, including modest economic growth, rising corporate earnings and slightly higher interest rates. That's why we think stocks have support to rise over time.
Stocks initially reacted negatively to the surprise election results – similar to how markets moved after Britain's surprise vote to exit the European Union, but rebounded sharply in early trading on Wednesday. While we don't know exactly what will happen next with stocks or policies, since 1944, the stock market has declined 66% of the time the day after a presidential election, with an average decline of 0.75%. However, more often than not, the market was higher by the end of the year as well as six months later. Two years after the election, stocks had risen by an average of 12.2%.* Consequently, it's important to base your investment decisions on your long-term goals rather than market reaction to the latest news or headline.
*Source: Bloomberg, Edward Jones calculations. Past performance of the markets is not a guarantee of what will happen in the future.
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