Yesterday, the US made history with an upset of presidential proportions. Despite being a huge underdog, Donald Trump clinched the presidency from strongly favored Hillary Clinton (who pollsters estimated had a 90% probability of winning). Following the upset, investor uncertainty spiked and Dow futures traded down more than 800 points.
Yet the S&P 500 actually ended the day up over 1%. As with the election results, this too was a big surprise. Theories for the sudden reversal range from the tempered tone of Trump’s acceptance speech, to the likelihood of business-friendly policies of the GOP. The truth is nobody really knows. Most people were expecting one thing but were totally caught off guard by another.
Investors who positioned themselves for massive shorts, thinking a sell-off was a “sure thing,” got a poignant reminder that there is no such thing as a sure thing when it comes to markets. Hopefully, it also served as a reminder as to why basic risk management principles like asset allocation, diversification, and position limits should always have a place in portfolios — that much should be no surprise.
Victor K. Lai, CFA
This blog is for informational purposes only. Nothing on this blog represents advice of any kind. Investing is inherently risky and involves the risk of potential loss.