The Election and The Markets

This presidential race has generated a fair amount of interest, concern, and questions from clients, arguably more than past elections. Some clients want to know how the election impacts our investment views and how we might adjust our positioning in anticipation; others have asked more generally about how we factor elections into our analysis and portfolio construction.

First and foremost, we never try to bet on outcomes. Regardless of market or election cycle, we attempt to maintain an investment discipline focused on the long term to limit risk, based on analyzing valuations and fundamentals. Viewed through that lens, here is what we are watching, analyzing, and positioning for:

1. Market volatility

Along with sudden shocks (e.g., terrorist strikes), unexpected developments (such as the Brexit vote results), and lately, central bank actions, presidential elections can certainly drive short-term market swings. But the longer-term impact is a different story. Data from Ned Davis Research evaluating election cycles from 1900 through 2012 shows that during presidential election years, financial market swings tend to be magnified in the final weeks of the campaign. This is particularly true for years in which the incumbent party loses. Once voting was over, markets generally rally going into year-end.

2. Economic fundamentals—long-term outlook

Over a full market cycle, returns are driven by fundamentals, not temporary shifts in investor sentiment, short-term momentum trading, flights to safety, or political rhetoric. While the US economy could hardly be called robust, growth is positive, unemployment is down, and wages are up. Consumer spending is increasing, and confidence recently hit a 12-month high. None of these are likely to change overnight based on what happens in November.

Yes, fiscal policy can impact all of the above fundamentals in the long term, and there are important differences in the candidates’ policy stances, but presidents don’t get to decide these things in a vacuum. Without knowing which, when, or how policy proposals will eventually be enacted, making preemptive changes to portfolios is more likely to hurt than help.

3. Downside risk

Current polling data has not given a clear sense of how markets are pricing, but the election’s outcome could still turn out surprises. Even if market prices accurately reflect the results, short-term and longer-term reactions tend to be different.

As financial analysts, we are more focused on the impact of US interest rates rising over the next several years. With the Federal Reserve and other central banks’ policies playing outsized roles in recent years—pushing stock prices higher and spurring bond yields to record lows—we see downside risks as they begin to pull back. We have already seen short-term spikes in yields push bond prices down and drive stock market swings in anticipation of rising interest rates. The S&P 500 currently valued at a historically high earnings multiple (price-to-earnings ratio), but this is not supported by strong corporate earnings trends. Therefore, a rise in interest rates from their abnormally low levels is just one thing that could put downward pressure on prices.

Conclusion: Invest for the Long Run

How do we deal with uncertainty, either election-driven or otherwise? The key is not making sudden moves in or out of markets based on headlines. Instead, we develop and assess a range of scenarios, then construct diversified portfolios that are positioned to meet our clients’ longer-term goals, while minimizing the impact of temporary market falls.

While elections do matter for a number of reasons—do not let the results or outside noise persuade you to making sudden moves that could adversely affect your long-term goals. Investing at reasonable valuations, balancing risk against potential reward, and not letting anxiety drive your decisions will likely matter more in the long run.

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David B. Mandell, JD, MBA, is an attorney, consultant and author of more than 10 books for doctors, including For Doctors Only: A Guide to Working Less & Building More. He is a principal of the financial consulting firm OJM Group www.ojmgroup.com, where Robert Peelman CFP^® is the Director of Wealth Management. They can be reached at 877-656-4362 or mandell@ojmgroup.com.

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This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.