The election connection — are the markets really affected?
John and Shirley, retirees from Youngsville, North Carolina contacted us recently, acknowledging “angst”. They heard should one presidential candidate or the other win the coming election, our investment markets might (or might not!) go into a tailspin. They asked whether they should liquidate their diversified portfolio of U.S. stocks & bonds, international stocks & bonds, precious metals, and real estate, and wait out the election results.
Every four years, we wrestle with the same question: How will my hard-earned invested savings be impacted by the election?
Every four years, it’s the same answer!
Consider the following:
Investors in U.S. stocks have experienced a lower volatility market for the last few months. The S&P index didn’t move 1 percent in all of August. One would have to go back to 2010 to find a less volatile market.
The President/Congress, can only have an impact on fiscal policy, i.e. where our government adjusts spending levels and tax rates. They have no direct impact on monetary policy, where Janet Yellen/Federal Reserve Bank sets interest rates to influence the amount of money that is available to spend in the economy.
Lyndon Johnson saw the worst post-WWII markets’ returns during a period of a strong economy. George H. W. Bush saw average markets’ returns, during a notably sluggish economy. There is no correlation between current economic health, and positive (or negative) stock/bond returns. Stock prices are more a reflection of investors’ future expectations than current sentiment.
Libertarian Peter Thiel argued in ’08 that “The Obama recovery is not real. It’s unclear how we’ll create jobs and get the economy growing again”. That was 6-months into our current bull market. Thiel’s hedge fund proceeded to lose 26 percent that year, while the S&P gained more than 26 percent (time.com/9.4.16).
Investors’ positive sentiment when their party is in-control, leads them to take higher-than-necessary risks in their portfolios. Investors in the party not-in-control tend to grow restless and trade securities more frequently. That impatience causes them to underperform (Professor Meir Statman/Santa Clara University/9.4.16).
The S&P has finished positive in more than two-thirds of calendar years since 1926, a period that’s seen eight Republicans, and seven Democratic Presidents (Taylor Tepper/6.22.16).
Some expected that Ronald Regan would be the “Patron Saint of Small Business”, while slashing taxes and red tape. That was in stark contrast to Jimmy Carter, who oversaw rising inflation, fuel shortages, and general misery for the little guy. Yet, returns for small-company stocks grew more than twice as fast under Carter, than Reagan (Taylor Tepper/6.22.16). A President simply does not have the power to consistently affect stock markets.
5 actions to do now:
Update your specific financial goals, cash flow needs, investment timeframe and tolerance for risk. Check whether you have a custom designed allocation strategy which allows for performance in a variety of environments, with a Certified Financial Planner (CFP®).
Focus on tactically adjusting your portfolio sectors because of economic not markets’ reasons. Avoid advisors/economists who promote large moves to any one specific sector, e.g. Energy, or who emotionally react to unproven events, e.g. Brexit.
Consider large, dividend-paying stocks. Dividends may not seem like a big deal; especially should the new President propose higher tax rates. But, remember, whoever is elected will last no more than eight years. You, on the other hand, are investing for your long-term future.
Remember, you tend to read only information which reinforces your own investment view! Commit to capping your trading/changes to no more than 5% of your portfolio this year to limit any damage from… guess who? Yourself!
Practice what you preach. Run your business. Don’t think your business will function differently if Hillary Clinton or Donald Trump win. Be prepared to adapt to changing regulations and taxes. Figure out a way to deal with it!
The opinions voiced are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. To determine which investments may be appropriate for you, consult with your financial professional.
While many securities aim to provide stable dividends, dividend payments are dependent on various factors such as market conditions and are not guaranteed. It also may be discontinued or modified at any time.
Investments in stocks will fluctuate with changes in market conditions and indices are unmanaged measures of market conditions. It is not possible to invest directly into an index. Past performance does not guarantee future results.
For questions or suggestions, visit ostrofefinancial.com. Branch address: 565 Brunswick Road, Ste. 15, Grass Valley.
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