Playing the Post-Election Market Slump

The current 3.5% slump in equity prices since the election has created a raft of uncertainty about the future direction of the market. In my view, the sell-off action is not sustainable. Here’s why:

• The fiscal cliff. In my experience, it’s the problems no one worries about (and are therefore not reflected in stock prices) that are liable to cause the most harm. Everyone knew about the fiscal cliff before Tuesday. It’s been baked in the cake for months, and thus is a non-issue.
• Disappointment. One-half of U.S. voters were left unhappy about the election results. Retail investors tend to trade with their emotions—and that is one of the worst reasons to change a portfolio. Nothing has fundamentally changed in the last 72 hours, and the sun will come out tomorrow.
• Good news. We continue to see better employment and consumer confidence numbers. Rates are still low, and energy prices are dropping. China is attempting to avoid a slowdown by allowing more borrowing. I don’t see a dark lining.

It could be that investors are nervous about positions merely because their allocations are off-kilter. Assuming a rightly sized mix of equity, fixed income and alternatives, a well-diversified investor should be fine in this environment.