The US stock market as measured by the S&P 500 Index has fallen for nine days in a row due to the uncertainty over US elections. According to a journal article this is the longest losing streak for the index since 1980. Market participants are griped by fears of Trump winning the race or launching a legal battle if Clinton wins.

Should Trump win the election, the current prediction among experts is that stocks may crash on the day after the election with estimates reaching as high as 10%. Hence if the market falls 10% or even 15% what should an investor do?.

The key to remember is that the best time to buy stocks is when there blood on the streets. Just because Trump, a Republican, gets elected does not mean that the US will turn into a banana republic overnight. In fact, the chances of that happening are next to zero. So regardless of who wins the election, smart investors can take advantage of cheaper equity prices if other investors panic and dump stocks.

Generally US stocks have performed well in the years following a big one day decline. According to an article by Andrew Oxlade of Schroders, the S&P 500’s biggest declines have been followed by annual returns that average 14.9% over five years, From the article:

The US stockmarket has delivered average annual returns of 14.9% in the five years following its worst days of the past quarter century, according to analysis by Schroders.

The data underlines the historic resilience of shares over longer timeframes, even following major shocks.

The biggest rebound was a return of 164%, or an annualised 21%, in the five years after a crash on 20 November 2008, when the S&P 500 fell by 6.7%.

That date fell during a particularly gloomy phase of the 2008-09 financial crisis. Shares in struggling Citigroup fell by 26% on the day, shortly before a rescue deal was announced for the bank.

Given the abject mood of the time investors may have struggled to accept that an investment of $10,000 in the market made at the start of that turbulent day would have grown to $26,400 within five years, before charges.

Click to enlarge

Source: How the US stockmarket performs after heavy one day falls, Schroders

Similar to the US, the UK equity market also performed well following major one day declines. The strongest recovery for the FTSE All-Share was after during the Global Financial Crisis and when the British banking sector was hit hard on on March 2, 2009. The index soared by 126% in the following five years.

Related ETFs:

• SPDR S&P 500 ETF (SPY)
• iShares MSCI United Kingdom ETF (EWU)

Disclosure: No Positions

The US equity market as measured by S&P 500 is up by just over 2% year-to-date. Compared to this return, most developed European markets in the negative territory with the exception of UK’s FTSE 100 which is up by about 10% since many companies in the index derive most of their revenue from emerging markets which are doing well this year. Among the emerging markets, all the major markets in Latin America are up so far this year.

A post by Russ Koesterich of Blackrock published yesterday noted that US stocks are expensive while international stocks are not. From the article:

As shown in the chart below, U.S. equities are trading at over 20x trailing price-to-earnings (P/E) and over 26x cyclically adjusted earnings (Shiller P/E). Valuations at these levels have historically been associated with lower forward returns. In contrast, equity markets in Europe, Japan and emerging markets appear somewhere between fairly valued and relatively inexpensive.

For long-term investors, the final point is particularly important. Value is often irrelevant in the short term, but over the long term valuations tend to mean-revert. For example, during the past 60 years, annual changes in the P/E of the S&P 500 had a -0.20 correlation with the change the following year.

Source: Are international markets back?,  Russ Koesterich, Blackrock Blog

Related ETFs:

• SPDR S&P 500 ETF (SPY)
• iShares MSCI Emerging Markets ETF (EEM)
• Vanguard MSCI Emerging Markets ETF (VWO)
• SPDR EURO STOXX 50 ETF (FEZ)

Disclosure: No Positions

One of the best time to buy stocks is when markets are volatile. Currently global equity markets are extremely shaky due to uncertainty over the US elections and investors’ fear of the Republican candidate winning the White House. Those who are able to invest new cash in the markets should buy stocks as markets swing wildly driven by greed and fear.

I came across an article by Andrew Craig of Plain English Finance at Money Observer site in which he notes the following three points for building wealth with equity investing.

First, you need to own all or, at least, most major assets in most major regions of the world. This should include cash, bonds, property, stocks, commodities (including precious metals) and a good split between the US, Asia and Europe (including Switzerland and the UK).

During the financial crisis of 2008-09, stocks plunged by over 50%. But gold increased by more than 20% in 2009 and oil prices hit an all-time high. So diversification across regions and assets is important.

Secondly, you should automate your investments by direct debit each month. This achieves ‘smoothing’ or ‘averaging in’. It removes you from the equation – which is usually a good idea.

The S&P 500 index in the US fell from 1,500 in October 2007 to the rather spooky level of 666 in March 2009 (a 56 per cent collapse. Ouch!). It then went from 666 all the way to north of 2,200 a few weeks ago and is now at 2,133 as I write (a 220 per cent recovery).

Automating the investment process eliminates trying to time the market and other human foolishness.

Finally, you must have confidence in your game plan and stick to your guns.

Professors Elroy Dimson and Paul Marsh of the London Business School have shown that investing in UK smaller companies has achieved an annual return of no less than 15.4 per cent going back to 1955! 15.4 per cent a year for 60 years!

Small caps usually yield higher returns than large caps. So it is not surprising that British small caps richly rewarded long-term investors. The key point here is that investors should hold high-quality stocks for years or even decades in order to build substantial wealth.

Source: Why stock market crashes don’t matter, Money Observer

Here are some picks that investors can consider adding to their portfolios:

Railroads: Canadian National Railway Co (CNI), CSX Corp (CSX),Norfolk Southern Corp(NSC), Union Pacific Corp (UNP)

Consumer Staples: Kimberly-Clark Corp (KMB), General Mills Inc (GIS), Reckitt Benckiser Group plc (RBGLY), Unilever NV (UN), Nestle SA (NSRGY)

Utilities: NextEra Energy Inc (NEE), Southern Energy (SO),Exelon Inc (EXC), Edison International (EIX), Empresa Nacional de Electricidad SA (EOC)

Consumer Discretionary: Diageo PLC (DEO), Church & Dwight Co Inc (CHD),British American Tobacco PLC (BTI)
Disclosure: Long CNI, CSX, UNP, NSC, RBGLY, GIS and NEE