In the hours after the president is elected, equity investors need to brace for volatility. What they shouldn’t do is panic.
That’s because regardless of how prices react on Nov. 9, next-day moves in the S&P 500 Index are useless in telling what comes after.
While the index swings an average 1.5 percent the day after the vote, gains or losses over the first 24 hours predict the market’s direction 12 months later less than half the time.
This matters because the compulsion to act in the vote’s aftermath is often very strong — stocks swing twice as violently as normal those days, data compiled by Bloomberg show. They plummeted 5 percent just after Barack Obama beat John McCain in 2008. But while nothing says Wednesday’s reaction won’t be a harbinger for the year, nothing says it will, either, and investors should think before doing anything rash.
“Trying to trade that is very difficult,” said Thomas Melcher, the Philadelphia-based chief investment officer at PNC Asset Management Group. “Even if the market sells off, if you have any reasonable time horizon, that should be a buying opportunity. The dust will settle and people will conclude the economy is OK.”
In the 22 elections going back to 1928, the S&P 500 has fallen 15 times the day after polls close, for an average loss of 1.8 percent…
Continue this story at Bloomberg
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