What a month November was! For the share market, it all looked a bit ugly to begin with, as the news of Donald Trump’s likely election hit the market. While the votes were being counted, the likelihood of a Trump victory became increasingly obvious. This all unfolded on the afternoon of Wednesday November 9 (AEST).
Here is how the Australian market reacted to Trump’s pending win, as measured by the ASX 200. We have highlighted November 9 in yellow. Thanks to Google for the graph:
So, while the news filtered in, investors sold shares – substantial numbers of them, and prices fell accordingly. More than 2% in a single day.
That was on the day that the results were being counted. But as the graph also shows, from that day on the market rose. It actually ended the month up 2.8%, and up 5.5% from its low point on November 9.
Now, you know what is really interesting? No one predicted that this would be the outcome. Indeed, if you think back, no one seems to have even predicted that Donald Trump would win the election. How is this for an election day headline from the New York Times: Optimism From Hillary Clinton and Darkness From Donald Trump at Campaign’s End.
If elections are hard to predict, then how much harder is it to predict market reactions to those elections? Obviously, it is nearly impossible: when it looked like Trump was going to win the election, the market fell 2%. This happened while the votes were actually being counted. The next day, when it was clear that Trump had won the election, the market rose 3.3%. This meant that the day after the election the market closed 1.3% higher than it had been the day before the election. The prospect of Trump winning was seen as bad news. The reality of him winning was seen as good news. Try to figure that one out.
The only conclusion from all this is that no one knows what effect a Trump presidency is going to have on the world economy. How can we say that? Well, share prices indicate what investors think about the future performance of the companies whose shares are listed. If investors expect companies to generate profits, then prices rise as those investors buy shares in that company. The opposite happens when investors think the future performance of companies will be poor. They sell the shares, and to find a buyer they have to drop the price. So, in the course of 24 hours, investors in general thought that the future economic performance of companies with shares listed on the ASX would be poor – before changing their mind and concluding that the future performance was going to be good after all.
The lesson in this is to look at longer-term trends and try to ignore day to day shifts in sentiment. That is why we always encourage clients to take their time investing into the share market (that is, don’t invest all your money all at once), and to take a timeframe of at least ten years (that is, don’t invest money into the share market if you are going to need it for some other purpose in the next ten years). Long-term, advanced economies take backward steps from time, but over the long term they keep advancing. Investors who own a small part of an advanced economy do well. The key is to not get caught up in short-termism. Don’t expect to make a gain tomorrow and you won’t be tempted to pull your money out when something unexpected, like a Trump presidency, happens today.
If you think it is hard to know what the share market will do next, then ‘snap on that’ that for property. In the property market, properties are only sold every several years, rather than every day as with shares. Now mix sentiment into the picture and trying to predict what the market is about to do is about as straightforward as herding cats.
For pretty much every one of the last ten years there have been people claiming that Australia’s housing market is about to crash. It hasn’t yet – but if it ever does, these commentators will try to claim some sort of sixth sense (“I predicted this”). Of course, they won’t tell you about all the previous years when the same prediction was exactly wrong. Property markets do fall from time to time, so if you predict a fall very year, eventually you will be right. A broken watch tells the right time twice a day.
That said, our eye was drawn to an article about an unusual situation in Melbourne. You can read the article here – although bear in mind that the article appears on a website that earns its money from real estate agents advertising properties. And you might be surprised to know that few real estate agents have any idea what they are doing when it comes to property investing. But the article describes an unusually high number of entire apartment blocks for sale across Melbourne. Such blocks are typically owned by very long-term investors, who take the view that ‘buy and never sell so your grandkids never have to work’ is the way to do well in property. Undoubtedly, some of these sales are happening because the properties have passed from one generation to the next, and the young folk don’t quite understand what mum and dad have left them, and are selling a golden egg. But there might also be a few long-term investors who are thinking that a further rise in prices over the immediate next few years is unlikely. These are the grandmas and the grandpas, who have seen it all before and should know what is coming next.
Add to that some talk that the next move in interest rates might be upwards (still leaving them not very high, so don’t let a move upwards frighten you), and it may be that the general housing market in Australia is taking a breather. In many ways, we hope so – affordability for younger people really is a difficult situation, and logic tells us that things cannot be unaffordable for long.
The good news is that, if shares are a long-term proposition, so is property. So, the next move in housing prices should not really be that important to you. If you are about to buy, then it would be great if prices were about to come off a little. But people have blown it over recent years waiting for prices to fall, so holding off has its risks. And any change to the long-term upward trend in prices is likely to be a plateau, rather than a dip. There is a difference between prices that simply stop rising and prices that fall. If you are about to buy, then just make sure you factor some interest rate rises into your calculations, and don’t go into your purchase thinking you will make a quick profit. For property, prices need to rise by at least 7% before you even start getting your money back – more if you borrow much of the purchase price.