Does 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 bring out the more emotional side of our personalities. A presidential election year, especially, can cause excitement or despair, depending on your side of the aisle.
Market returns during an election cycle tend to be lower than years immediately preceding and following an election year. That shouldn’t come as a surprise. We tend to be guided by our emotions, and the time during an election is when emotions are going to be most tied to election results. What we historically see after the fact, though, is a return to normalcy once emotions have time to settle down. History reminds us that emotional investing is not the safest approach. Successful investing begins with a plan that accounts for goals, time horizons and risk comfort levels.
The first step in planning accordingly, then, is to determine what the economy is doing right now. 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 Federal Reserve 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. We’re not in a situation of Alan Greenspan’s “irrational exuberance” theory, where the markets are unfairly overvalued. Market valuations right now are well within long-term averages, especially given the current rate of growth. While it appears that everything is fairly valued, even small troubles can “spook the horse” in an election year with heightened emotions.
- Inflation is low. Inflation has remained around 1 percent through 2016, which is low.
- Growth is slow. Fewer jobs have been reported so far this year than expected, and retail sales have been disappointing. The United States’ gross domestic product growth in the first quarter of 2016 was also at its lowest in two years, at a rate of 0.5 percent.
- 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 Index in history, as it had a return of -4.96 percent.
- This particular presidential cycle has produced two of the most widely disliked candidates in history. We’ve seen that election years historically post lower returns than in the years before and after an election cycle, but this year is unique in that both candidates are viewed so unfavorably. The lack of unity around each presumptive nominee means we may see further emotional instability surrounding the markets during this election cycle.
If 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. Clinton is more of a centrist candidate, and if the GOP retains control of Congress, it’s possible she could cooperate with a Republican Congress and balance the budget the way her husband did in the ’90s.
In case you didn’t realize it by now, Trump as president carries a lot of uncertainties. For example, he’s talked about imposing tariffs on foreign goods. But beyond all the rhetoric, this will probably translate to “more of the slow grind of policy-making.” However, Trump could wield his “art of the deal” expertise and broker some pretty popular, nonpartisan solutions. 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 presidential candidate is likely to have a dramatic effect on your investments.