Published October 12, 2016
Uncertainty regarding the economy and the direction of the capital markets is always high during presidential election years. Investor doubts increase as campaign ads and speeches highlight everything that is wrong and seem to suggest that nothing is right. Such is the climate of politics – heated and contentious.
Despite the obvious unpleasantries of today’s political climate, the reality is that the markets do not like uncertainty. An article titled Election: Markets are nonpartisan long termi shows that elections do have a short-term effect, with equity market volatility spiking 100 days before an election and falling dramatically in the 100 days that follow.
What does this translate into for the long term? This is where things get very interesting and I do believe it can become a trap regardless of our political persuasions. Search long enough online and you will most certainly find articles and blog posts objectively proving something as a matter of course should one party win over the other. There is no end to the data trying to prove what happens when an incumbent party wins or loses, or with a Democratic victory or a Republican victory. For every proof statement there is another interpretation of data to contest it. The evidence is clear that in the long term the markets respond to company earnings, worker productivity and many other factors beyond the Oval Office.
Our system of government was designed with checks and balances of power. The executive, legislative and judicial branches each limit the power of the other. The office of president is certainly important for many reasons, but the President does not act alone. One simple check in place to the executive branch is Congress, which makes our nation’s laws and is directly responsible for budgets and spending. The power in our country is not centralized.
Austan Goolsbee who formerly served as the Chairman of the Council of Economic Advisors, which advises the President of the United States on economic policy appropriately said “I think the world vests too much power, certainly in the president, probably in Washington in general for its influence on the economy, because most all the economy has nothing to do with the government.”ii
We cannot discount the importance of electing capable, honest and ethical servant leaders to our nation’s highest offices. That said, the success of the American and global economy never did, and we don’t believe ever will, depend on one man or one woman.
Regardless of policy changes proposed or made by the next president, they will take time to produce results, either good or bad. In some cases it may take many years and could ultimately impact future presidents. Some presidents take office under great economic conditions while others face significant headwinds. While our elected leaders do have an impact, companies will adjust, adapt and respond to the economic factors prevalent at the time regardless of who is sitting in the Oval Office.
Knowing that the only constant is change and that enterprising entrepreneurs and businesses around the globe will continue seek profitable ventures no matter who is elected as the next President of the United States, what does wisdom suggest?
We believe it is wise to keep a long term view. The short term is always full of important questions to which nobody is certain of the answer. Despite the fact that uncertainty rules the day, the markets can provide opportunities for long term growth. In short, elections are full of emotion in the near term, but sound investment policy insulates itself from the whims of the day. What will happen within the financial markets in the next 12 days, 12 weeks or 12 months is anybody’s guess, but we cannot lose sight of what is likely to occur in the long term.
Following the terrorist attacks of 9/11 Peter Lynch provided commentary to shareholders of Fidelity mutual funds. Mr. Lynch said at that time that “which way the next 1,000 to 2,000 points in the market (the Dow Jones Industrial Average) will go is anybody’s guess, but I believe strongly that the next 10,000, 20,000 and 40,000 points will be up.” His point to investors at that time was that the short term is always unknowable, but that he was confident in well run businesses in the long term. On the date of his commentary, September 20, 2001, the Dow Jones Industrial Average closed at 7,986. At the time of this writing the Dow Jones Industrial Average stands over 18,000. Mr. Lynch was right on the direction of the next 10,000 points despite the Financial Crisis of 2008, which many economists consider the worst financial crisis since the Great Depression. Despite the atrocities of 9/11 and the difficult bear market that followed and the Financial Crisis of 2008, the next 10,000 points indeed were up.
Today we face an election with a certainty that at least half our nation will be disappointed on November 9. Which way the next 1,000 to 2,000 points in the market will go is anybody’s guess, but we believe as Mr. Lynch did in 2001 that the next 10,000, 20,000 and 40,000 points will be up.
The election is certainly a time of uncertainty, but changing investment policy based on election outcomes is ill-advised. One must be wary to change a long-term investment strategy that, given enough time and money, will work and exchange it for a bet. If history has a lesson for all of us it is that consistently timing the markets is impossible. A drastic change in investment policy, based on the outcome of a presidential election, is at its core an attempt to time the market.
If we do anything between now and the election, let it be a review of our financial plan and confirm that our portfolio optimally supports our plan over its intended time horizon. This approach is appropriate and a prudent practice with both Republican and Democratic presidents.
Written by North Star Resource Group.
i Lemco, Jonathan. “Election: Markets are nonpartisan long term.” Vanguard, https://personal.vanguard.com/us/insights/article/election-impact-portfolio-092016. Accessed 27 September 2016.
ii Healey, Jim. “U.S. Presidential Elections and Financial Markets.” Loring Ward, https://advisorinsightsblog.com/2016/07/06/u-s-presidential-elections-and-financial-markets. Accessed 27 September 2016.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested.
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