by Paras Anand
Head of Pan-European Equities
The world is not short of comment and analysis following the election of Donald Trump to US President. In some ways the coverage is indicative both of its unexpected nature and its historical significance. It is fascinating, therefore, that an event of such magnitude has created barely a ruffle in stock markets.
Step back from the typically hyperbolic language of the financial news anchors: "roiled" ,"plummeted", "collapsed" (the early S&P futures indication) to "surged", "rocketed" or "recovered" (the stronger performance through the trading day) and the moves that we saw in markets have been very much within the bounds of normal day-to-day oscillations.
So why has the reaction of notoriously manic-depressive Mr. Market been so measured in the wake of such a seismic event? Consider the below a form of amateur behavioural psychoanalysis.
Whilst Mr. Market is prone to bouts of amnesia and the tendency to exhibit forms of the same behaviour on a repeated basis, there is also the tendency to overweight the importance of recent events. Despite a number of market commentators trying to downplay the similarity of the Trump victory with Brexit (truly odd when you consider Trump's own repeated comparisons), I think that it provided a powerful reference point in two respects.
First, it warned of the dangers of instinctive reactions as panic-sellers in the wake of the referendum found themselves horribly wrong-footed as, arguably, have some of the more recent panic buyers of UK domestic names. By far the best course of action for most investors over Brexit was to do nothing. This lesson was probably still ringing in Mr. Market's ear as November the 8th arrived.
Second, the weeks and months post the UK referendum have acted as a reminder that, even in the context of what are obviously historical events, nothing in politics changes quickly and that in the US, as with the UK and Europe, managing the change itself will likely act as an enormous soak on political productivity. Business, as we know, tends to operate at a very different metabolic rate. The evidence of UK-domiciled companies 'getting on with it' would also have helped in putting the impact of the election into proportion.
The focussing effect is the tendency for single dimensions or factors to end up entirely dominating people's evaluation of a situation. In the case of the US election the factor that has arguably garnered the greatest focus is the prospect of a further pick-up in inflation.
Whilst the normally volatile equity market was only modestly impacted by the events of the election, the same cannot be said of the bond market. In fact, this was the critical distinction between Brexit and Trump's victory. The former was considered to add to economic uncertainty and be a deflationary event (hence we saw the long end of the yield curve in the UK come down) whereas the latter has been interpreted as clearly inflationary with commentators citing both the potential impact of trade tariffs and the stated intent to invest heavily in infrastructure.
Perversely, the reaction may not have been much different had Clinton been elected as the domestic economic strategies of the two candidates had some notable similarities (infrastructure spending and incentives for international companies to repatriate more of their overseas earnings). The reason that the outlook for inflation has drawn such an arguably disproportionate focus is that markets have for the last few years been dominated by the 'lower for longer' or 'lower forever' perspective on policy rates - a view that is, for the first time, being seriously challenged.
Over recent years the market has continued to pay a high price for certainty. An environment in which the outlook for end-demand appears less fragile could see investor appetite return for shares in sectors that have been more challenging over the couple of years such as financials (banks in particular), resources and healthcare.
Hindsight bias is the tendency to immediately reframe your consideration of unexpected events and re-categorise them as being wholly unsurprising. Common phrases associated with this behaviour are "...it was obvious that..." and "I knew all along that...".
When we examine the reaction of political and market commentators to the news of Trump's triumph, there appears to be a surprising amount of hindsight bias at play which has evidently diminished the sense of shock or dislocation.
Perhaps following a year which has seen Brexit, Corbyn elected as the leader of the Labour party and Boris Johnson appointed to Foreign Secretary, Mr. Market has been largely unperturbed because he really did see this coming.