Post Election Note & Thoughts


As we write this, the markets are busy digesting the prospect of a Trump presidency. So are we, and it seems that the initial read is that things will be fine in the near term. We will have to take the information as it comes in the longer term. Markets closed up, and certain industries, financials, industrials, healthcare and energy all rallied. Conversely, technology, consumer staples and utilities were beaten up a bit. Also, emerging markets as a group sold off on fears of a less globalized economy. Bonds were weaker and the ‘fear trades’ of gold and long US treasury bonds also were weaker.

Last week we spent a lot of time introducing KilterHowling to our new base of clients in Montana, more on that later.

One thing that comes up often in these conversations is how we manage money and think about risk. We do not try, nor do we expect others, to predict the future. That one cannot, with any reliable accuracy, predict the future with any consistency – say meaningfully more often than 70% of the time – should be obvious. And so we build “all-weather” portfolios pre-positioned for unexpected events. And we try very hard to help our clients get their asset allocations right. This means we endeavor to get you situated with right balance of risk and return, upside growth and downside safety, holding a bit of cash where that is prudent, and so on. But in light of today’s events this all feels a little too simple, too obvious.

When Brexit happened we, along with most of our peers, friends across the pond, and nearly any pundit who manages to form an opinion, were surprised. But the legions of voters who spoke, of course, were not. Perhaps they are still working through the ultimate outcomes and impacts of Brexit, but the generalized sentiment of “we want change” was spoken loudly and clearly.

Markets were roiled, and then bounced back. Perhaps that is to be expected – we tend to be “buy the dip” biased as we know that research shows markets tend to overreact to bad news and under-react to good news. But of course, some dips are not dips but rather prolonged corrections, bear markets and, in some cases, recalibrations of the entire economic regime and the path of future economic activity.

That it took only about three weeks or so for markets to recover their ‘pre-Brexit’ levels might tell us something. It tells us that markets, in aggregate, are able and willing to look through large events. But the key question, in terms of side-stepping a long-term meltdown or bear market versus looking through a temporary dislocation, is how to distinguish between the two?

For instance, a ‘buy the dip’ orientation would lead one to potentially buy, buy, buy all the way down during the financial crisis, whereas so often we see a bounce back which makes buying dips and sitting tight through corrections the right move. Indeed, this is true most of the time in stocks.

Here is how we see and approach this, and today is a good example:
It is very hard, almost impossible, to catch an unexpected selloff – and the cost of doing so, whether in terms of hedging cost or just sitting in cash, will almost certainly even out over time as the hits and misses tally up.

But a change in trend, in momentum or in sentiment plays out more slowly. Information such as “Brexit wins!” or an unexpected military action, etc., that does not lead to immediate observable change, is just that, information. And markets are pretty good at taking the long view. So are good investors.

But when information accompanies action, when markets change in a way that the future expectations are now different, then the trend line changes. For example, there was much information during the financial crisis, but much of it was accompanied by real changes to the immediate infrastructure of capital markets: Lehman Brothers is in trouble is information; Lehman Brothers is now locking its doors is a change in how capital markets function. The commercial paper market, which finances most of American industry, effectively froze up – action, change. Incrementally the markets absorbed these items and continued down, down down.

The same is true on the upside: profits improve, productivity improves, trade grows, vehicles are purchased, and incrementally, markets tend to move higher.

Here is the takeaway: Much like Brexit was quickly shown to be something that, at best, would play out over two years or more, so too a Trump presidency. In striking an unusually conciliatory tone in his acceptance speech, Trump has already upended some of the worst expectations many might have had. He ran a campaign so light on details that few would be able to explain any of his plans, from foreign policy to economics. The salient point is this: whatever actions accompany the Trump presidency will play out over years, not days. Markets react quickly, but calibrate slowly.

There is an old bromide, too often ignored, that says “In the short-term the market is a voting machine; in the long term it is a weighing machine.” – Benjamin Graham, widely considered the father of value investing.

We say often that we “play the long game” at KilterHowling. And that means every day thinking about our clients’ needs, their objectives and how what we can do to be the best financial partner possible for far longer than the immediate market reaction to bad news

One of the best summary notes we’ve read today, and we started very early, is from another blogger named Josh Brown who writes widely on the markets. He reminds us that from pollsters to prognosticators and including all journalism, all forms of forecasting utterly failed. His take on today is here:

We hope you will reach out to us over the coming days – including the weekend – and talk about any thoughts or fears you have. We can modify portfolio allocations, update you on performance, get you into your client portal, or just have a conversation about things. Maybe you sleep better with a little extra cash. Above all else, don’t be a stranger, shoot an email, give a call, let’s get a coffee. We are here for you and your needs. Whether you are pleased or despondent over the election, we leave you with a bit of wry mirth:

“Democracy is the worst form of all government except for all the others.” – Winston Churchill

America is a great nation, made up of great, motivated, hardworking people who want to see the country and its citizens prosper. We truly believe that. Our visions vary greatly, but perhaps the ‘next move’ is one of comity, conciliation, and we can all use a little of that.

Kreighton, Will & Dawn