Election shouldn’t influence investment approach
‘Wait-and-see’ mode isn’t necessary, history suggestsNovember 3rd, 2016
Personally, I can’t wait for the election season to pass. There are few topics more emotionally charged than politics, whether you’re a Republican, Democrat, Independent, Libertarian, or a player to be named later.
By the way, if you think this election is either unprecedented or unusual, I recommend you look up the less-than-friendly comments that took place between John Adams and Thomas Jefferson.
Regarding the emotional aspects of elections, Ben Bernanke, former chairman of the Federal Reserve, offered this insight.
“In a highly polarized environment, commentators and advocates have strong incentives to argue that the country’s future is bleak unless their party gains control…It may also be that our roiled politics are worsening how we collectively perceive the economy.” In this case, Ben nailed it.
Those emotions are in full view today. During the past couple of months, the comments I’ve heard most frequently are primarily based upon the speaker’s unease and uncertainty regarding the effect of this election on their financial futures. As a direct result of these concerns, many of those people feel as if they perhaps should delay making any new investment decisions until after the election results are known. It’s a normal, natural human emotion. In all walks of our lives, uncertainty discourages risk-taking.
Feelings of unease are everywhere. According to a survey conducted by the Hartford Funds in August, nearly nine in 10 investors surveyed thought presidents have some influence over stock markets. Nearly a quarter even said they think the president has a lot of influence.
As a direct result of these widely held feelings, it’s pretty hard to miss the large numbers of articles, commentaries, and the ever-present chart and graph presentations, all seemingly solely designed to advise investors. There’s “all the latest” on how different asset classes, sectors, and industries will perform. All of these conclusions are based upon which party controls the executive branch of government. This simply adds to the overall unease and uncertainty for investors.
Presidential candidates often draw attention to the challenges facing the nation, everything from economic policies to immigration. And, as we’ve been hearing, campaign talk tends to focus on the negative. People tend to overrate the effect of political events. We saw it with the so-called fiscal cliff, sequester, government shutdown, and Brexit. Now, we see it with this election.
Tempting as it might feel for investors to default to the wait-and-see mode, history shows that’s not necessarily a winning response. There’s no certainty that stocks will move a lot around an election. And, if they do, most election-related moves have been fairly short. Not investing for a long-term purpose solely to avoid a short-term move that may, or may not, happen can be seen as a risk in itself.
Elections or not, stocks tend to be forward-looking. Market movements won’t wait for your favorite news human to read the results on election night. Stocks start pricing in the results in advance, factoring in all the polls, analyses, debates, opinions, pledges, as well as the “don’t worry - this is what they’ll really do” kinds of disclaimers. An election outcome will likely be priced in well before the election is over, and the investor actually acts on it. Whatever the outcome, the end of an election improves clarity—and markets like that.
To be sure, politics can be an important market driver. But any material, fundamental negative reaction to a new administration usually happens in the first year and usually slowly. Politics have very little to do with the direction stocks move. Factors such as interest rates, corporate profits, investor confidence, and global markets are the main categories that can affect the economy and markets.
Over the past four decades, stock prices have gone up and down during both Republican and Democrat presidential terms. Unlike the gap between each party’s “occasionally” differing views on policy, there’s a common thread in historical returns: the differences in returns reached under either Democrat or under Republican presidents are not statistically significant. Using global financial data going all the way back to 1853, the average annual stock market returns – based on the party controlling the White House – were 11 percent for each party.
Keep in mind that tumultuous events have been a constant theme for presidential elections throughout history. The next president will be important for markets as each candidate has their own plans for taxes and regulations, and each will have their own challenges getting anything through Congress.
However, presidents don’t have the ability to wave a magic pen and immediately change our economy. Much like head coaches in sports, presidents probably receive too much credit when things go well and too much blame when things go poorly.
No matter who wins the presidency, many investors forget that the ability of that individual to affect change is highly dependent upon the current political balance of power in Congress. If Congress holds a split majority in the House and Senate, or the opposition party controls the entire Congress, then the winning presidential candidate will probably have a hard time getting their entire agenda approved.
There are many other influences on portfolios beyond who’s sitting in the White House, so don’t allow any anxiety around this election to keep you from staying focused on your long-term goals. Regardless of which side of the political fence you stand on, the results of your retirement investments are much more likely to be impacted by your personal actions than by the actions of whoever is currently in Washington.
Stocks might fall before, during, or after the election simply because that chance always exists with risk assets. Timing the markets is usually difficult in any circumstance, and big political events aren’t worth churning your portfolio over. All this does is to cause you to wind up trying to time a highly uncertain event.
As always, please keep in mind that this article represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events.
After all, your time horizon is likely to be much longer than a four-year presidential term. Those who look beyond the headlines, focus on long-term goals and avoid trying to time the market have tended to reap the rewards in the long run. That’s true not just during elections, but any time of the year. Our future and the market prices are, and will be, much more influenced by the actions of everyday people in the economy and not bureaucrats on the fringes.
When it comes to many of our actions and thoughts, emotions will usually overcome logic. In that regard, I suggest that investors keep their political passions separate from their investing strategy.
Going about your investments should be as coldly rational a process as possible. Beliefs about which political party is best may encourage you to vote, but shouldn’t discourage you from investing.
Resist the urge to make a market move based on your opinion of the president. The market truly doesn’t care. Instead, focus on strong companies going for good values. Well-positioned, well-led companies will create investment value regardless of who sits in the White House.
As I stated previously, stocks have done well under both Republicans and Democrats and they’ve also “underperformed” as well. It’s important to remember that, while who controls the White House and Congress is certainly a factor that influences the expectations and behavior of traders and investors, it’s just that; one of many factors and certainly not the be-all and end-all factor in determining long-term stock and bond market performance.
Michael Maehl is a financial adviser and Spokane-based senior vice president of Opus 111 Group LLC, a Seattle-based financial services company. He can be reached at 509.747.3323. Securities and Investment Advisory Services offered through KMS Financial Services, Inc.