The Dangers of Headline Investing

It was November 2016. After improbably winning the Republican nomination, Donald Trump was a significant underdog in the general election. Almost every pundit gave him very little chance to win. For those of us who invest in the stock market, that was considered a very good thing.

After all, the stock market hates uncertainty. The consensus view among market experts was that in the unlikely scenario that Trump did win, we were in for a significant pullback in the markets. Bridgewater, one of the most widely respected hedge funds, had estimated a 10%+ decline was likely in the event of a Trump victory.

The consensus opinion at the time was pretty obvious. Trump had almost no chance to win (right up until the election he had just over a 10% chance of pulling out a victory) and as a stock investor, you were in for significant problems if he did.

Of course, there ended up being a significant problem with this conventional wisdom. It was 100% wrong. While market pundits saw uncertainty and turmoil as a result of Trump’s election, the market itself saw lower taxes and lower regulation going forward, both of which are significant positives for the market. What should have a big decline according to conventional wisdom instead turned into a major rally.

Lessons Learned

So what is the lesson of this? Is it that Donald Trump’s policies were the right ones for the stock market? Or is it that stock investors should want Republicans to win the White House? Some people may believe both of those and some may not, but I think the lesson here is a broader one. The lesson is that trying to invest based on headlines is almost always a recipe for failure.

If you wanted to adjust your portfolio to benefit from the election ahead of time, you had to correctly predict two things.

  1. Who was going to win.
  2. What that win would mean for the market.

If you followed conventional wisdom going into the election, you didn’t just get one of those things wrong, you got them both wrong.

And this isn’t a one-off thing. Historically, events that would seem to spell major problems for the stock market haven’t, and other events that might have predicted major gains haven’t  either.

For example, look at this chart showing the performance of stocks and other asset classes. Stocks actually tend to do better during military conflicts compared to their performance over time.