Sign up with your email address to be the first to know about new products, VIP offers, blog features & more.

You are viewing Politics & the Economy

Keeping Tariffs in Perspective

Recently, I was asked about my thoughts on the tariffs and the impact it may have on a portfolio.  What follows is my response:

“I see this as a giant game of chicken between China and the US.  I see this causing a lot of anxiety and volatility in the market, but I’d imagine that someone is going to “blink”, a deal will be struck and no tariffs will be enacted.    There will always be some issue that is of concern that gets blown out of proportion which leads to an overreaction among investors (thanks to the 24/7 media coverage). It could be the possible government shutdown, conflicts in Ukraine, North Korea, Brexit, elections, or rate hikes.  All of these received the same kind of media attention over the last 3-4 years.

It’s hard to separate ourselves from these kinds of issues because we are so close to them. It’s currently happening around us.  It’s on the news. It’s being discussed around the water cooler.  We are seeing it translate to the performance of our accounts.  And that can be scary.

Ultimately, in working with clients, I take a longer-term view on the markets. How will we look back in five years on the impact of these tariffs if enacted?  I can’t help but believe that it would be a foggy memory for most investors, just like Brexit, the taper tantrum, and the government shutdown.  And you take it out to an extreme example, some investors are starting to forget their fears they had during the last recession because they are seeing their account values grow significantly above the pre-recession values.

So in the grand scheme of things, I don’t see the tariffs as having a material impact on your situation in the long term. “

The Usefulness of Market Outlooks

“Who knows” was my answer when I was recently asked about my own outlook on the markets for 2018.

Over the last few weeks, my inbox has been flooded by dozens if not a hundred market outlooks by prominent research firms, economists, and strategists.  And they are all completely different.  Some see significant stock market appreciation while others see little to no growth. Some see more growth in the US than abroad.  Others see more growth in the foreign markets than in the US.  Some see rising rates to be an issue.  Others do not.  And some even predict a negative year for the stock market. Chances are they are all wrong!

They are interesting to skim through to understand what they believe are the biggest issues to occur in 2018.  But it’s just as fascinating to see what is not included in their outlooks.  There are even some research groups that make a living by reading through old Market Outlooks and calling out all the wrong predictions.

Think back to this time last year.  Trump was just sworn into office and it seemed like everyone was waiting for some kind of market correction to occur.  But it didn’t!  Volatility is now way down.  Markets have shrugged off much of the bad news that has come out in recent months (such as North Korea).  Any market outlook that expressed these kinds of views would have been quickly dismissed if written in early 2017.

It’s a reminder to stay focused on your investment strategy.  There is a lot of noise that distracts investors and all to0 often leads them into making poor investment decisions.

Political Impacts on your Investments

Since Donald Trump was elected in early November, the US stock market has surged to new heights.  We have fielded dozens of phone calls from clients asking how we are viewing this situation.  Below is a summary of our thoughts:

  • We believe this a tortoise vs hare race in terms of investing.  Lots of investors are piling into the market right now as they don’t want to miss this surge.  Or they are seeing unbelievable opportunities.  Caution is being replaced by exuberance for some investors.  This is the first time since the recession of 2008 and 2009, that we are hearing investors feel confident and optimistic in the markets.  This kind of knee-jerk reaction reminds me of the story about the tortoise and the hare, where the hare is overly confident in his abilities while the tortoise remains steady and purposefully in his pursuit. In this case, we will gladly be the tortoise. We will continue our steadfast approach to investing and will not deviate from our process.
  • What’s changed since trump’s election: Trump has continued to tweet his positions and that has been well received by the market.  No policies have been actually implemented, yet the market is pricing itself as though the policies have been implemented.  We all know intuitively that a president can’t just snap his fingers to make things happen.  As Trump hits resistance in implementing his plans, we expect the stock market to overreact to the bad news.  We expect more volatility this year as the market tries to correctly price itself based on the actions and words (and tweets) from an unconventional, and unpredictable leader.
  • Foreign Opportunities: As measured by valuations, the US stock market is expensive to invest in right now.  But when we look oversees, we see stocks on sale.  When the 2008 and 2009 recession occurred, the US stock market came back and has reached new highs, but many of the foreign markets have continued to muddle along over the last few years.  One related item is how the dollar will do relative to other currencies – if the dollar continues to strengthen, it could mute any returns we see abroad.
  • Small Cap Opportunities:  As the US and other countries embrace a more nationalistic attitude, foreign trade will likely be affected.  This means, that large US companies that see a significant profit coming from overseas trading will likely be hurt thanks to tariffs.  On the flip side, smaller US companies that serve mostly customers in the US will likely do better since they will not have to compete as much with foreign companies (bc there goods would be slapped with tariffs coming into the US).

Bottom line:  While we do see some opportunities, we plan to maintain a defensive approach to investing.  We see the current run up in stock prices to be unwarranted and that there will be a reversion to the mean at some point.  The opposite is true when looking abroad – the foreign markets have limped along for too long and we expect a reversion to the mean to occur at some point.

Republican or Democrat: Historically, Which Party Does a Better Job Growing Your Investments?

Republicans and Democrats each make strong and compelling arguments as to why their approach and strategy will be better than their opponent. The media, think tanks, and experts are constantly making solid arguments for one candidate or the other. And in many cases these arguments and research findings conflict with each other.

Conventional wisdom suggests that a Republican President will do a better job helping businesses grow, which will in turn increase the return on your investments. Yet, the Democrats have released some interesting information that suggest otherwise.

Lots of research supports the idea that the stock market (and your investments) do better when the incumbent party keeps the office. And yet, there seems to be many exceptions to that statistic when one factors in market volatility or look at a wider time frame.

So how do we as investors and voters determine if it’s better to have a Democrat or Republican in the White House when everything appears to be shades of grey?

If there’s no clear research showing that one party is better for the stock market than the other, chances are there is no statistically significant correlation. In other words: The presidential election itself has little bearing on investment performance. And all of these headlines, articles and research we read pushing one candidate over the other may just be marketing fodder.

Here are a few strategies to keep in mind over the next few months:

  • Expect volatility as the election draws near. The markets do not like it when there are looming questions about the future direction of the country. Most likely this volatility is short term and will clear up as investors digest the implications of one president over the other. This will be especially true if the candidates target a particular industry (such as health care or defense)
  • Remember you are a long-term investor. Much of the noise and headlines will not have a long term impact on your investment future.
  • Stay the course with your investment strategy. The candidates, their respective parties, think-tanks, experts, pundits and the media will try very hard to rattle your cage to sway your opinion and to get your vote. They will use fear tactics or they will paint rosy pictures of the future. And unfortunately, many investors will make poor investment choices prior to the election. They will move to cash if they are afraid or they will move into an asset class they believe will soar if their candidate wins.
  • Any significant policy changes will take months to develop and potential a year to roll out.

How to Deal With the 2016 Presidential Election and Your Portfolio

It’s tempting to position your portfolio to take advantage of new policies being proposed by a new President before they have been elected or shortly after their election. Evidence suggests it’s better to wait instead of trying to time the market.

Here are a few strategies to keep in mind over the next few months:

  • Expect volatility as the election draws near. The markets do not like it when there are looming questions about the future direction of the country. Most likely this volatility is short term and will clear up as investors digest the implications of one president over the other. This will be especially true if the candidates target a particular industry (such as health care or defense).
  • Remember you are a long-term investor. Much of the noise and headlines will not have a long term impact on your investment future.
  • Stay the course with your investment strategy. The candidates, their respective parties, think-tanks, experts, pundits and the media will try very hard to rattle your cage to sway your opinion and to get your vote. They will use fear tactics or they will paint rosy pictures of the future. And unfortunately, many investors will make poor investment choices prior to the election. They will move to cash if they are afraid or they will move into an asset class they believe will soar if their candidate wins.
  • Any significant policy changes will take months to develop and potential a year to roll out.

Why We Shouldn’t Mix Politics and Investing?

We can’t help but hear about the election on the news. And when it comes to each candidates economic policies, we are quick to imagine how it will affect our investments. We assume that Trump’s determination to bring jobs back to the US could boost US stock prices and perhaps hurt foreign stock prices. We think that because Clinton has talked about reform on Wall Street, that financial companies would be hurt if she were elected President.

But the connection isn’t as clear as the media makes it out to be. Both politics and the markets are very complex systems with many, many moving parts. We are quick to arrive at various conclusions as to cause and effect. Or quick to identify patterns. In reality, it’s nearly impossible to predict how presidential policies will affect the stock market. We may think we see a pattern or understand cause and effect, but there could be more factors contributing to the expected outcome

All of these thoughts can be connected to a set of common investing errors that are discussed in a growing field of behavioral economics. The following article does a great job of capturing some of these elements