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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

Comparing Chess To The Stock Market And The Election

The average chess player can see 1-3 moves ahead in a game of chess. But a grandmaster chess player can see 10 moves ahead and sometimes up to 20. More interestingly, when they look at the board they see shapes and patterns not number of moves.

Playing chess is like connecting the dots between the stock market and the election. The media, think tanks, special interest groups and the talking heads are focused on the implications of the election on the stock market and the economy. If Trump is elected, the pundits are predicting one outcome and comparing it to the hypothetical outcome if Clinton wins.

They try to paint a very clear, logical picture of the how one policy will help America and the economy. But the oversimplification does not properly consider the hundreds or thousands of variables that affect the economy or stock market. While these experts try to account for as many variables as possible, it’s simply impossible for them to do so with any sense of reliability or accuracy.

These supposed experts see one set of moves and believe that’s how it will play out. If they were playing chess, they would be an amateur chess player who could only see the logical progression of their agenda if their opponent performed exactly as expected. And when their opponent did something unexpected (which usually happens), their plan would be thrown out the window.

When it comes to listening to these experts talk about the effects of the stock market as a result of the election, keep in mind that there are thousands of variables that will affect the stock market. In fact, there is a lot of research that suggests the election has no effect on the stock market in the long term.