After reading my 641^st article confidently explaining ‘what Trump’s election victory means for markets’; I was reassured that there seemed to be a broad consensus on its implications. This allowed me to invoke one of Bob Farrell’s ten investing rules: “When all the experts and forecasts agree – something else is going to happen”. While the clarity provided by the election result may have provided some relief, it should not embolden us into believing we know what will occur next, because the truth is that we have no idea.

No matter how uncertain the outcome of a particular event is, what we know with absolute certainty is that when the results are in we will discuss them as if they were an inevitability. And so it is with the US election, where in reading the post-mortems of Trump’s victory we are led to wonder why the Democrats contended the election at all given how obvious its conclusion was.

From an investment perspective it is, however, critical to remember that the result was – for many – considered to be the flip of a coin with very few people willing to take a high conviction view on who the victor would be. This is important because it brings into sharp contrast an odd dynamic whereby most market participants were (rightly) unwilling to predict the outcome of a one-shot, binary election result around which there was a huge amount of data and information, but are now comfortable telling us what the longer term market and economic consequences of it will be. If we can’t answer the easier question with confidence, let’s not try answering the harder one that is immeasurably more complex.

Another favourite investor activity following an event such an election is to look at the immediate financial market reaction, hoping it will provide us with a sure guide as to what lies ahead in the coming months and years. It would be fantastic if this were the case, but it isn’t. When it became clear that Trump would regain the Presidency were investors hastily updating their inflation assumptions and quickly reworking their equity DCF models, or simply trading based on how they expected other investors to trade? Almost certainly the latter.

Market activity around such periods is both self-referential and self-reinforcing. Market participants decide how they will react prior to the event (in the most recent case the so-called ‘Trump trade’) and then react in that way immediately after. It doesn’t provide us with any longer-term fundamental insights, as much as we might want it to.

As markets were busy digesting the results of the 2024 election I looked back at the initial reaction to Trump’s 2016 win. In the two weeks that followed, the ten-year treasury yield rose, as did the dollar index, while in US equity markets financials, industrials and energy outperformed the wider market. And what happened over the full four-year term? Treasury yields fell, the dollar index weakened and all three of the aforementioned equity sectors underperformed the index.  

If the market was really telling us something immediately after that election, why was it wrong?

There are four critical reasons that make taking confident views about election results is so dangerous for investors:

– We don’t know what they will do: Although we can surmise and hypothesise, we have no certainty around what decisions a new administration might make.

– We don’t know what the consequences will be: Even if we did know what decisions would be taken, trying to understand the financial market consequences is close to impossible given its sheer complexity and deeply interwoven nature.

– We don’t know how much it will matter: Even if we knew what a new government would do and had some idea of the broader implications, it is still difficult to judge how to weight it relative to other factors. Is the occupant of the White House more important to equity market performance than how AI / tech develops from here? There are many, many variables that will matter and some will almost certainly be more consequential.  

– Other stuff will happen: Perhaps the most essential challenge for investors is that perennially frustrating problem of other things happening, things that we are not even considering today. These are likely to overwhelm whatever we are thinking about right now.  

—

Investors abhor uncertainty and we are always looking for clues to how the future will unfold. Unfortunately, unpredictability is an ingrained feature of financial markets, not something that can be solved, and it is dangerous to believe it can be. More often than not admitting that we don’t know is the right answer and the one likely to lead to better investment outcomes over the long-run.   

–

My first book has been published. The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions. You can get a copy here (UK) or here (US).