I’ll give it to the Americans, they certainly know how to surprise us. Their latest, of course, is the unexpected choice of Donald Trump as their 45th President, a man with no previous political experience who has never held an elected office.
Asian markets wobbled overnight in reaction to the unfolding drama, and the FTSE 100 gave up 2% on opening this morning, though the UK’s top index quickly recovered the loss and is actually up a few points as I write these words.
UK investors seem unperturbed, possibly in the hope of strengthened economic cooperation between the US and UK as we pull away from Europe, although renewed trade barriers have to be a big fear from the new Trump administration. Should we really be scared?
The Brexit effect
We only need to look back a few months to the Brexit vote to see the effect that major political upheaval can have on stock markets. In that case, share prices tumbled across the board, led by big losses for the UK’s top banks.
But many of those losses were quickly reversed, and the FTSE 100 is now up 10% since the day of the referendum. To put that into perspective, mind, the pound has fallen by 15% against the dollar over the same period, so the value of the FTSE has actually declined a little in real terms — but nowhere near as far as the rout that many might have expected.
That’s just the way markets work — if something tweaks one part of a free market system, the effects spread out like ripples on a pond, and everything re-adjusts itself to a new equilibrium. And it’s very difficult for political change to cause any genuine long-term change in a market — I was never a fan of Margaret Thatcher, but she was spot on when she pointed out that “if you try to buck the market, the market will buck you.”
That’s true of individual political terms like Mr Trump’s, but it’s also true of more sweeping longer-term changes like leaving the EU. The banking crisis had a serious effect, but it won’t last that long, and even two World Wars (and any number of World Cups) haven’t been able to stop the inexorable rise of stock markets over the past 100 years and more.
Keep on buying
So what should the perplexed investor do now? What they’ve always done, I say — just keep on investing in top-quality multinational companies, with global reaches, guaranteed long-term demand, and the ability to generate oodles of cash.
BP and Royal Dutch Shell are going to keep pumping out oil for many decades yet, and a short-term oil price crisis won’t stop that — we’ve had them before and got over them just fine. In fact, BP and Shell haven’t even reduced their dividends this time.
Commodities like iron, copper, coal, aluminium, zinc… ? Sure, the Chinese economy might slow its demand a little for a few years, but in the long run? All the valuable dirt dug up and sold by Rio Tinto, BHP Billiton, Glencore and the rest of them will be in huge demand for a very long time.
No, over the long term, Trump, Brexit… none of it should have any lasting effect on the success of investing in good shares.
