“Be aware of politics; don’t get involved in politics.”
Dr. Chuck Kwok
The quote above is from the international finance professor I had in graduate school. Dr. Kwok gave us a list of things he wanted us to think about when we ventured outside the classroom into the business world again. I think this is sage advice and, although he meant it for the business environment, it applies to the real world too – especially when making investment decisions. The U.S. presidential election is only a couple of months away and several clients have asked how we’re positioned for this change in power coming in November. Given this, I want to provide my opinion on this election’s implications on your investments and the stock markets.
Please note that I am not taking sides here; my only concern is what effect the candidates/election may have on your portfolios. You don’t pay me for my political opinions. You pay me to watch your money, so that’s my only motivation.
I want to begin this topic with a question for you. Would you expect the stock market to do better under a Republican or Democrat? Most people say Republican. Why? Republicans are perceived to have more business-friendly policies than Democrats. Yet, according to a recent Kiplinger’s article, it turns out that for more than a century now, the Dow Jones has done slightly better under a Democrat (9% per year versus 6% for a Republican).
One also may think that, given how business-friendly the U.S. is relative to the rest of the world, our country would have the strongest stock market. However, that’s not necessarily true either. According to Triumph of the Optimist (based on a study by Dimson, Marsh, and Staunton), from 1900-2000, Sweden, Australia, and South Africa had stronger stock market returns – three countries that tend to be more socialistic than capitalistic.
At the end of the day, presidential elections and political parties are insignificant factors in how we position your portfolio. Despite what you read and hear on the news, it’s noise.
Yes, the president could do some damage. Our commander in chief could push tax increases and is said to have the power to alter trade agreements, which could cause problems for business if a trade war occurs and tariffs are imposed. Deporting illegal immigrants could cause harm also. As The Economist reported recently, Arizona is an example of the implications caused by deporting immigrants – a crackdown on illegal immigrants in 2007 shrank the state’s economy by 2%.
As it stands now, Clinton is up in the polls and market returns are increasing. The market may not necessarily believe she is better for business, but it seems to take comfort in what is more known or certain versus what some perceive to be unknown or uncertain. Translation: We may not like Hillary, but we know what to expect if she is elected; with Trump, the market is unsure what will happen. In fact, a business and finance reporter for The New York Times recently mentioned that, “If Mr. Trump were to start polling strongly against Mrs. Clinton shortly before the presidential election, while still pledging to introduce tough protectionist trade policies, the stock market would most likely sell off on fears of what those policies might do to the economy.” (Don’t kill the messenger.)
At the end of the day though, no one definitively knows what each presidential candidate would do once taking office. Plus, most of the returns stated relate to the Dow Jones Industrial Average and the S&P 500 – two indexes that measure the performance of large blue-chip companies in the U.S. only. Our stock portfolios consist of large, mid-size, and small companies in the U.S. and international markets. In fact, nearly half of your stock portfolio is invested in securities of companies (via mutual funds or ETFs) domiciled outside the U.S.
In other words, the U.S. presidential election is only one piece of a very big pie. Our election won’t necessarily have an effect on, let’s say, Brazil’s or India’s stock market. Moreover, instead of focusing on what’s going to happen this year or next, we are focusing on what will happen with stocks over the next five years. That means ignoring the election and favoring a strategy backed by strong academic research. To do so, we zero in on companies that are: selling cheap relative to their book value and have strong profitability and good growth potential. So, Dr. Kwok had a good point. It’s okay to be aware of politics; just don’t let it impact your investment decisions.