I am always very interested in the stock market action in the weeks after a US presidential elections. Why? Because the first time I tried to ignore the significance of the 2004 US Presidential election, I was mauled badly and lost a huge sum of money due to my under estimation of how much a US election can affect the stock market. At that point of time, I was still a relative new comer in the world of investment with only 5 years of experience under my belt. On top of that, I was exposed to the relatively tepid political scene in Singapore, whereby elections do not usually impact the stock market much. 8 years down the road, with a few more observed international elections under my belt, I can now appreciate better the potential impact of a election to the stock market. The US Presidential election in this instance, is very much like the 2004 one. The 2008 Presidential election is a non-starter as almost everybody predicted that Obama will win. The US citizens were clamoring for a fresh change of leadership as the economy was akin to a slow motion train wreck: No matter who wins the Presidential election in 2008, the stock market will continue to fall.
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| Obama and Boehner, the Majority Speaker for the House of Representation. The 2 major players in the fiscal cliff talks. Image from Associated Press. |
Obama went on to win his re-election and what was surprising, was the margin of his win. The market went into a panic mode and the US stock market, as along with the stock markets around the world, went into a sharp correction. The reasons:
1) Obama will raise tax (for the rich) and US Citizens will have less money to pump into the stock market
2) Obama will raise capital gain tax and there will be less incentives for investors to invest in the stock market as the potential returns will be diminished
3) Obama will create a similar scenario to that of the debt ceiling again, whereby there will be a political deadlock between the President, The Senate and the House of Representatives on the up-coming fiscal cliff issue. The stock market will probably be volatile with so much uncertainty, till the fiscal cliff issue is resolved.
For those who are unfamiliar with the US fiscal cliff issue, Click here
Having understanding how world politics and stock market works, my hypothesis works along these lines of thoughts.
1) Obama should win the election because of the way the electoral votes are structured.
2) The stock market will have a sharp drop as investors think that Obama is bad for the stock market
3) However, even an amateur political observer like me predicts that Obama has a higher chance of winning, won't the professional fund managers know better than me? They would have sold ahead of the election to prevent their portfolio from losing value, but instead, the market held steady until the results were announced.
4) If the big boys were not selling pre-elections, it also means that they have confident of the future of the US stock market and may be looking to buy into cheaper stocks post election.
My action? Follow where the big money goes, hold on to the equities and ride on the wave up after the short correction.
Seems like my hypothesis has been sound so far, as the equities market did correct sharply after the US election, but rebounded so strongly the week after, such that we are now at a higher point than the day before the US election.
The Next Big Moves
I have 4 considerations after observing the markets for the past 7 weeks:
1) The China stock market has hit the bottom and seems like a good time to enter.
2) The European markets have been stable so far and seem like potential impact of the Euro debt crisis will be minimal, with all the first aid patches they have gone through in the past 3 years. The Euros is also rising strongly against SGD, which work in the favor of allocating some capital in this depressed but high potential market.
3) Malaysian election is round the corner and there is a possibility that the opposition parties might make more headway, making the market correct sharply like what had happened in the last election
4) The US fiscal cliff is just around the corner, and from the latest development and the failed "Plan B" fiasco by the Republican Party, America will have a high probability of falling off the cliff, for a week or two, before one of the parties relented and gave some way for a bipartisan solution. Like the debt crisis, it will be political suicide for the leaders if they do not resolve the fiscal cliff issue eventually. So in all possibility, political brinksmanship will be the flavor for this issue again.
Looking at all these, the decision seems simple:
1) Move out of Malaysia and buy into China.
2) Reduce exposure in US and move a portion into Europe.
I am still reluctant to move in totality out of US stock market yet, because I still believe that the country is at the beginning of its recovery cycle, and the path of the least resistance seems to be up, in the near future.
I have not called in the switch, mainly because the market is having a good run in the past few weeks. Switching out and losing performance during the switching process, do not benefit the portfolio. I am waiting for the short period in which the market will take a breather, to make the switch. so as to minimize the impact of any positive movements from the markets. From the looks of the last 2 days performance, the market seems to have stabilized and I will be probably calling in the switch just before the New Year.
Attached is the performance of the portfolio. I have added the Performance of MSCI World Index for a better idea of the performance of the portfolio.
Merry Christmas and Happy New Year! And No, the world did not end today, and so we should continue to invest for our future and not worry about any Apocalypse.
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