“The friend in my adversity I shall always cherish most. I can better trust those who helped to relieve the gloom of my dark hours than those who are so ready to enjoy with me the sunshine of my prosperity.”
- Ulysses S. Grant
Don’t mix politics with friendship is an adage I have tried to live by throughout my life. We all have our reasons for believing what we believe. One’s politics are often based on personal life experiences rather than what is actually true or can be proven. Political beliefs and logical thought do not always go hand-in-hand, which is fine. Someone’s opposing philosophical beliefs has never prevented me from experiencing the joy and benefits of friendship with that person. My main criteria for friendships are fairly simple – they must show mutual respect, and be honest, good, caring people.
Closely following the adage of not mixing politics with friendship is the idea of separating one’s political beliefs from their investing decisions. Every four years we go through the process of electing a new President of the United States. And every four years, we have a vocal group of people explaining why if their side doesn’t win, everything is going to blow-up. How many times have we heard, “If candidate X wins, I’m packing my bags, moving out, and selling all my investments?” Not only is this extreme, but it is also bone headed. Here in the U.S., I have yet to see this strategy pay-off.
Ben Carlson, is an investment manager who writes the blog, “A Wealth of Common Sense.” His recent post, “Don’t Mix Your Politics With Your Portfolio” makes more sense now than ever. The Presidential election is only weeks away and emotions are running high. Let’s not allow our emotions to overwhelm our process.
Don’t Mix Your Politics With Your Portfolio
Posted October 12, 2020 by Ben Carlson
A Wealth of Common Sense
With the presidential election just weeks away, you can expect to be inundated with predictions about how the winner will impact the markets and the economy.
It may be entertaining to guess how the outcome of the election will impact your wealth, but this becomes a futile exercise once you realize how much there is that we don’t know about what comes next. Not only do we not know who is going to win but also:
· We don’t know which policies they’re going to implement while in office.
· We don’t know how amenable the other party will be to those policies.
· We don’t know how the person in office will impact consumer spending and sentiment in the economy.
· We don’t know which sectors or industries will be the biggest winners and losers.
· We don’t know how investors will react or what they have already priced in regarding the outcome of the election.
When Trump got elected, there were pundits and investors galore predicting an enormous market crash. Instead, stocks rose steadily for most of his first term until the pandemic hit. There have been more than 130 new all-time highs on the S&P 500 during Trump’s tenure.
When Obama got elected, there were people predicting, “[His] Radicalism Is Killing the Dow.” Instead, stocks set off in 2009 on a bull market that lasted for the entirety of the next decade. There were nearly 130 new all-time highs on the S&P 500 during Obama’s tenure.
The long-term trend of the stock market has been up and to the right no matter who the President is:
And no President in modern history has been able to prevent the stock market from falling either:
Every President going back to Herbert Hoover has experienced down markets.
We also don’t know who will hold a majority in Congress coming out of the upcoming election. The promises candidates are making on the campaign trail right now won’t necessarily come to fruition if they don’t control Congress. The performance of stocks also varies depending on who controls what historically:
The truth is politicians have far less control over the stock market than most people would like to believe. Policy outcomes often show up on a lag and come with unintended consequences. As we’ve seen this year, the economy and the stock market are not always on the same page. It might give you an illusion of control to know your party holds the nation’s highest office, but no one person is bigger than the stock market.
In addition, much of the performance in the stock market under any administration depends on where we are in the cycle when they take office. Bill Clinton and Ronald Reagan both took office at opportune times during one of the biggest bull markets in history. On the other hand, Franklin D. Roosevelt’s time in office was bookended by the Great Depression and WWII, while George W. Bush took over just before 9/11 and ended his term during the Great Financial Crisis.
Regardless of who wins next month it’s important to keep politics out of your portfolio. Money decisions are already rife with emotions, biases, and blind spots. Bringing politics into this equation only amplifies those emotions and makes it nearly impossible to make rational clearheaded decisions.
If you’re thinking about selling all of your stocks based on the winner of the presidential election, be sure to ask yourself the following questions first:
· If I sell out of the market because of the President, does that mean I have to stay out of the market until a new President takes over?
· If I sell out of the market because of the President and the stock market moves higher will I buy back in or continue to sit on the sidelines?
· If I sell out of the market because of the President and the stock market crashes will I buy in at lower prices or continue to sit it out based on my political beliefs?
· If I sell out of the market because of the President and things don’t turn out as bad as I originally thought, how will I know I was wrong?
There are never any easy answers when it comes to handicapping the markets because no one knows what the future holds.
There are only two things I’m certain of when it comes to mixing politics with investing decisions: (1) The stock market will go up and down no matter who the President is, and (2) Investing your money based on how you vote in November will not result in levelheaded financial decisions.
The consensus opinion out there is volatility will be high, both going into the election, and then in the weeks following. This may be true, however higher volatility surrounding the election is already anticipated by participants and therefore priced in. For professional, leveraged investors, I don’t doubt greater volatility presents opportunities – I used to live by this rule in my former life as well. But keep in mind that greater volatility not only provides traders with more opportunities to make money, but also provides them with more opportunities to lose.
My personal view is that the U.S. stock market is going to continue to melt-up to absurdly high valuations over time, and my responsibility as an investment manager/adviser to my clients is take advantage of that opportunity should it play out as I expect. Easy money (monetary policy), politics (fiscal policy), and technological advancement are the main drivers here.
From where I stand nothing has changed. U.S. technology stocks will continue to lead and are being given a boost by trends that have been forced to accelerate as a result of our political response to the COVID-19 pandemic. Housing and non-commercial real estate related investments are also an area in which we have been overweight and believe will continue to outperform.
As far as interest rates go…. don’t hold your breath on the long term (almost 40 year) trend of interest rates going lower to reverse course anytime soon. Why would they? Public debt is piling up at an unprecedented rate, which means more output is required to service debt. This is an unproductive use of capital and is a drag on future growth. As long as the status of the U.S. dollar remains the world’s reserve currency, I look at increased levels of public debt for the U.S. as well as similar developed economies (Japan, Europe, UK) to be disinflationary. Couple this with technological advancement and global capitalisms’ acceptance throughout the world via open markets and mostly free trade (which from a negative perspective keeps a lid on developed market wages while benefiting lower earning international emerging markets workers), gives me little reason to doubt the bond bull thesis. Long-term rates are going lower.
Justin Kobe, CFA
Founder, Portfolio Manager & Adviser
Pacificus Capital Management
Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Cambridge and Pacificus Capital Management are not affiliated.
Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. These are the opinions of Justin Kobe and not necessarily those of Cambridge Investment Research, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.
Investing in the bond market is subject to risks, including market, interest rate, issuer credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies is impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counter-party capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Diversification and asset allocation strategies do not assure profit or protect against loss.