Good Evening RIP friends,
Did you sell all your stock funds? You know that doomsday is coming, don’t you? What are you waiting for??
Let me explain it clear:
- If Ronald Drumpf wins, the market is going to crash because he’s insane and none will invest in US.
- If Hilarious Clinton wins, the market is going to crash because she will tax companies and rich people so that none will invest in US.
Clear, right? S&P 500 is currently overpriced!
It’s obviously an ingenuous lie. Market price already contains this information.
“Uh, RIP, you made my heart skip a beat! So the election won’t change my fund value?”
Oh no no no, it will surely be hit! It’s just that you don’t know in which direction. And you can bet that the expected value after the election – given all other conditions stay the same – is the current fund’s value.
Let’s do some math: let’s assume a share of your S&P500 fund is priced 100. Let’s assume the market expectation in case of victory of candidate X is +10%, i.e price would jump at 110 per share. Let’s also assume that in case of victory of candidate Y the market expectation is -20%, i.e. a price of 80 per share. If your price today is 100 it means that there’s a 66% probability that candidate X will win against 33% of Y. Today’s value is the expected value.
If tomorrow a new poll says odds of winning are 60% for X vs 40% for Y and market expectations in case of victory of X or Y are the same +10% and -20%, then the new share price will drop to 98, which is the new expected value (110 * 0.6 + 80 * 0.4).
If, instead, odds of winning for X and Y stay the same but candidate Y announced a new wall on the Canadian border, bringing market expectation in case of victory to -30% instead of -20%, new expected value for the share is 96.666 (110 * 0.666 + 70 * 0.333).
“What? Is it really so easy for a candidate to make the market drop?”
That’s just a simplification. I hope that in case of such a claim the odds of winning for Y would drop and expected value for your share would actually increase in this scenario. Another level of simplification is that market doesn’t just react on what candidates say. That’s just propaganda. It reacts on true well founded hypothesis on what would happen in case of victory of X or Y. Who’s funding their campaigns, which kind of lobbies they have behind and so on. Market is more stable than our fears.
“So… should I sell?”
As I’ve already said, trading has costs. By trading a lot you’re expected to lose money, unless you’ve some kind of knowledge that’s not publicly available. Otherwise, selling is just an expensive bet. A less-than-zero sum game. Not selling is a better bet. A more-than-zero sum game.
Like any normal day in the market.