Trump Tweets

President Donald Trump has been shaking up the whole establishment, issuing travel bans, repealing the Affordable Care Act (ObamaCare), tweeting about industries like defense and auto manufacturers.

When a President of a country calls out companies or industries, the stock market reacts to it. When Trump tweeted about the F-35 jet being overpriced, six of the 28 stocks in aerospace and defense industry dropped 2% or more.

When he tweeted about car manufacturers building plants in Mexico saying they should build the plants in the US or pay big border tax, Toyota’s stock loses $1.2B in value 5 minutes after the tweet came out.

When Trump issued the immigration travel ban on a weekend. Airline stocks in the US that has international destinations lost $4.9 billion in market value.

When Trump signed an executive order to review or end the financial regulations set up during the Obama administration which was enacted after the 2008 financial crisis that was meant to protect consumers, bank stocks went up.

With all that’s been happening with the market, you would think the market is currently extremely volatile. However, the CBOE volatility index is actually showing that the market volatility is at multi-year lows.

It’s interesting to see how the market reacts or shall we say overreact to things. It could be the Greek default, Brexit or Trump Tweets. But it’s always the same case, the market reacts to immediate or short term news.

Take a look at this chart.

As you can see from this chart, in the short term, markets go up and down…a lot. But in the long term, the trend is up. Why is that? That’s because over the long term, we become more productive, we create new industries, new technologies and inflation causes the market value to go up.

The problem most investors have is they follow the crowd instead of staying with their plan. Remember 2008, during the financial crisis when everyone taught the world is going to collapse? Everybody was pulling their money out of the stock market. Those who did and didn’t put their money back in by 2009 would have lost out on the biggest gains they would have had since.

The low point of the Canadian market which is the S&P/TSX was around Feb 9, 2009. The index was at 8,123. This was the low point coming from a high of 14,714.70 in April 30, 2008. The index then proceeded to collapse for the next 11 months to a low of 8,123, a decline of -44.80%. If you suddenly saw your investment go down by half, I would panic too.

However, if you had stayed invested or put in new money around Feb 9, 2009. Up to the closing price today of 15,617.30 on the S&P/TSX Index, you would have made 92.26% return in 8 years. That’s a compounded rate of return of 8.51% per year. Not bad for staying doing nothing but waiting out the market.

Most investors only started to go back to the market around 2011 and 2012 after the market already made the most gains from 2009-2011. That’s when people started to feel the financial collapse was over. As is always the case, people’s sentiment about the market is always too late and wrong.