Let me know if this sounds familiar: Your Facebook News Feed has blown up with messages like “The sky is falling! If my chosen candidate doesn’t win, the markets are doomed, and so are my investments!”
Elections tend to bring out the more emotional sides of our personalities. A presidential election year especially can cause excitement or despair, depending your side of the aisle.
This could be the reason why election years tend to reap lower-than-expected market returns. The way we’re wired is not conducive to the stock market. As humans, we tend to let our emotions guide us, but that’s not the safest approach to investing. Successful investing begins with a plan that accounts for goals, time horizons, and risk comfort levels.
So what can we expect from the markets during this election cycle?
No matter which side of the political spectrum you fall on, you should rest on the foundation of: “Regardless of who wins, we will plan accordingly and stick to the basics.”
The first step in planning accordingly, then, is to determine what the economy is doing right now.
The Pros and Cons of the 2016 Economy
We had slow growth coming out of the 2008 crisis, but markets have come back strong. Things are recalibrating, and the markets are looking for growth.
Eight years since the 2008 crisis, our economic situation isn’t all good, but it isn’t all bad, either. Let’s consider the pros and cons:
Oil prices are low. Oil prices may have climbed back to around $50 a barrel after falling below $27 a barrel in February, but they are still low compared to the prices of 2008, when they climbed above $140 a barrel.
Interest rates are low. There was some concern when the Fed raised interest rates in December, but the yield curve has remained relatively steep.
Valuations are not euphoric. In the 21st-century markets, bubbles seem to rise and pop with increasing regularity, but the markets of 2016 have not been characterized by such euphoria, which has led to less volatility.
Inflation is low. Inflation has remained around 1% through 2016, which is low.
The employment rate is good. The Gallup Good Jobs Rate rose to 44.9% in April, the highest it’s been that early in the year since April 2010.
Growth is slow. Fewer jobs have been reported so far this year than expected, and retail sales have been disappointing.
The first stage of the Fed tightening its rates always comes with heightened volatility. The Fed increased its rates in December. A month later, the markets celebrated the new year with a bad start. The first two weeks of January were the worst for the S&P 500 in history, as it had a return of -4.96%.
The presidential election introduces uncertainty. 2016 is an election year, which is historically characterized by volatility.
Once we’ve evaluated the pros and cons of the economy, we can come up with a plan. We can’t look into the future, but we can look to the past to get a sense of how people have reacted in similar situations.
We Can’t Predict the Future, So Let’s Learn from the Past
Despite the pros listed above, the market in 2016 looks like it might be one characterized by uncertainty. But that’s nothing new, right? Let’s look at investment performance in past times of uncertainty.
2011 Euro crisis
After several European states found themselves drowning in debt they couldn’t pay back, the world markets seemed to be on the verge of total collapse. While the crisis is not necessarily over, the markets have continued on, relatively unscathed in the long run (although risk aversion among investors seems to have increased considerably).
Fiscal cliff crisis
The markets dove deep as the US approached the fiscal cliff in 2013, but it recovered pretty quickly after the president and Congress came to an agreement that avoided a government shutdown. In fact, the S&P 500 and the Dow posted their best year since the 1990s.
The 1970s and inflation
When most people think of the economic picture of the 1970s, they think of three things: the gas shortage, rising food prices, and rapid inflation. The ’70s were a mess, with some of the worst market returns in history in ’73 and ’74 and the “Death of Equities” in 1979, but the market still was positive overall for the decade.
Most recent market correction
The Euro Crisis combined with trouble in China to create a pretty market-phobic start to 2016. The Dow lost 5.5% of its value, and the Nasdaq sank 8%—one of the worst market year starts in history—yet the market got its act together and turned in a positive first quarter.
Those are a few of the worst periods the stock market has experienced, but many people still seem convinced that the markets will collapse based on the results of the 2016 US presidential election.
Is the Sky Falling? A Few Guesses at Each Presidential Outcome
The nominations for the general election have gone to Hillary Clinton and Donald Trump. For the below prognostications, let’s assume Congress remains in Republican control. Here’s what we might be able to expect from both candidates:
If Hillary Clinton wins… Expect something similar to the markets under President Obama—more of the slow grind of policy-making. That’s not necessarily a bad thing.
If Donald Trump wins… In case you didn’t realize it by now, Donald Trump as president carries a lot of uncertainties. For example, he’s talked about imposing tariffs on foreign goods and tax cuts for the super-rich. But beyond all the rhetoric, this will probably translate to “more of the slow grind of policy-making.” We expect many of the same scenarios and arguments, which we’ll figure out as they happen.
Here’s the key takeaway:
If you invest with a long-term, balanced, and consistent approach, neither candidate is likely to have a crazy effect on your investments.
There will be periods of time when your faith can be tested in the system, but as we’ve seen based on past scenarios, you don’t want to let those events determine what you do next. In investing, you need to maintain a long-term, broad focus. A narrow-sighted approach will result in less than optimal results.
If you want to discuss keeping your finances on track regardless of who is president, contact FPC today.