The S&P 500 (^GSPC +0.12%) did well in 2016, producing another winning year and extending the bull market in stocks. Even though the index had some troubled times, strength in the U.S. economy and in fundamental business prospects for the index's constituent stocks helped the market overcome challenges and continue its generally upward path. Technically, the S&P 500's best day came on Jan. 29, in the midst of a terrible month that had investors worried about plunging oil prices and rising interest rates. Yet since we've already looked at Jan. 29 as the best day of 2016 for the Dow Jones Industrials (^DJI 0.13%), we'll turn instead to a day on which the S&P climbed just a small fraction of a point less, posting a gain of 46 points on Nov. 7 -- the day before the presidential election.
A premature celebration
To understand why the stock market reacted so sharply on Nov. 7, it's important to have some context. The presidential campaign had been a heated one for nearly two years preceding the election, and the level of animosity between the two major party candidates never stopped intensifying as Nov. 8 approached. Perhaps because of the perception that Hillary Clinton would be more predictable and conservative in her attitudes toward the political establishment, the stock market on many occasions seemed to be correlated with her election prospects.
That phenomenon showed itself on two occasions toward the end of the campaign. In late October, the FBI announced that it had reopened its investigation of Clinton in light of new emails that had surfaced. The S&P 500 reacted negatively to the news, reflecting the investigation's potential downward impact on Clinton's election prospects.
Image source: Hillary Clinton for President.
But then, over the weekend preceding the election, the FBI came back with its assessment of the new evidence, finding that it didn't justify any further investigation. That seemed to reinvigorate Clinton's chances of winning the election, and the S&P 500 reacted with a rebound that sent it up more than 2%, falling just shy of scoring its largest advance in index points for 2016.
Of course, we all know what happened next. Donald Trump shocked the world by defying pollsters and winning the election. Moreover, even though many analysts had predicted huge declines in the stock market in the event of a Trump victory, negative sentiment in the U.S. financial markets lasted only a matter of hours following the election results. Quickly, an end-of-year rally took hold that lifted stock markets to even further heights.
Why the move was right but the reason was wrong
The 2016 presidential election certainly wasn't the only time that the stock market's predictions of a key even turned out to be inconsistent with its subsequent behavior. When the U.K. voted to leave the European Union in the Brexit decision earlier in 2016, investors initially panicked, fearing a major change in the global economic environment that could have had systemic ramifications for the entire financial system. Yet those fears turned out to be overblown, and stock markets quickly rebounded from their immediate reaction to push higher.
What has turned out to be consistently true is that stock market investors often prefer the certainty of knowing how a given event has turned out, even if they don't necessarily get the result they expected. Even what's perceived as a negative outcome is at least a known outcome, and investors can stop worrying about potential worst-case scenarios and deal with reality going forward.
Moreover, the election campaign was full of emotional responses among voters. That might be completely appropriate in the political world, but the stock market tends to punish investors who react emotionally with their investment portfolios.
How to win on future best days
If anything, the best lesson investors can learn from the S&P's best days in 2016 is that the justifications that market participants come up with to explain short-term moves in the market can obscure the longer-term trends that are the true drivers of market performance. Trying to predict those short-term moves can get you in trouble and make you miss out on what turn out to be some of the biggest positive moves in the market.
In a solid year for the S&P 500, Nov. 7 stands out as a key day for the index. Yet those who celebrated the news on that day and then subsequently sold out when the election results didn't pan out the way they had expected missed out on even larger gains. That's one reason why remaining invested for the long run has advantages over trying to trade short-term events.
