Let me begin by commenting on the election and the market’s reaction thus far. While many likely expected market upheaval resulting from a delayed election outcome, that has not been the case. The market was up sharply on Monday and that trajectory continued through yesterday with the S&P 500 up over 7% through yesterday. Better than expected employment numbers cheered the market this morning, but it would not surprise me to see the market trade lower today just because it has been up so much this week.
As I have said to many of you in one-on-one conversations, from the perspective of post-election market returns, I was less worried about the outcome of the Presidential election and more worried about whether the Senate remained in control of Republicans. My thinking is related to whether the corporate tax cuts that have spurred the economic growth over the last 3 years could be reversed. The fact that the blue wave did not materialize and there is a good chance that the Senate will remain Republican-controlled, the current tax policies may be safe. I think that is why the market is up so much this week. The outcome of the Senate has not been finalized, so we will have to wait a bit longer to see what happens.
In my last post, I revisited the link between corporate profits and market returns. In this one I’d like to revisit the link between time horizon and market returns. We have all experienced the market gyrations resulting from any number of different factors, but investments in the equity markets are designed to fund long-term goals not short-term needs. Time and a sufficiently long time horizon are on an investor’s side.
Take a look at this chart. It shows the probability of a positive equity return over various time horizons.
If you have a 1-day time horizon and are asking the question, “will my portfolio be up tomorrow compared with today?”, there is a 54% probability that it will, but also a 46% chance that it will not. We are all well-aware of the market’s daily moves.
But as we extend the time horizon, the probability of equity gains increases substantially. If your time horizon is 10 years, the likelihood of experiencing a gain in the value of an equity portfolio is a whopping 94%. Even knowing the ever-present investing disclaimer that past performance does not guarantee future results, I’ll take a 94% probability of success every time. I’ll just have to lengthen my time horizon to achieve it.
If you have questions or would like to chat, please let me know. I hope you all have a great weekend.
