Presidential Election and Your Portfolio - Alaska Permanent Capital Management


Presidential Election and Your Portfolio

Brandy-NiclaiInvestors always have a long list of things to worry about in the markets. And if you can’t think of anything at the moment, just turn on cable news or go online. Within ten minutes you’ll likely be ready to sell everything and settle into a doomsday bunker. In recent weeks the election has been in the spotlight, but investors might not actually have so much to worry about come November 9th.

We’ve sifted through all the scary and negative headlines to answer two important questions; first up, how will this election impact your portfolio?

Jeff Pantages, Senior Vice President of Investments here at APCM gave us the bottom line in his recent blog post. History has shown us that stocks and the economy go up when either party is in power.

However, Jeff also noted that markets don’t really like change and uncertainty. So, we should expect volatility until the market deciphers how meaningful all this rhetoric actually is and voters have elected the next president. After the election, investors will refocus on earnings and the economic and monetary policy outlook.

At this time, the markets have priced in a Clinton victory and a divided congress. Should this come to fruition it will substantially reduce the likelihood of major reform. This base case is probably the best scenario for risky assets.

Markets would most likely react less favorably to a democratic sweep or a surprise Trump victory, as these events would force repricing in both stocks and bonds. But, political experts are placing very low odds on Trump. The University of Virginia’s Center of Politics has had a 98% accuracy rating in projecting all races for the President, Senate, House and Governor since 2000. They give Trump a 25% chance that he will be occupying the oval office come January.

25% is not zero, but it doesn’t really warrant immediate and drastic changes to investment strategy either. It’s important to remember that our political system was created with checks and balances and congress can do a lot to block political ambitions. As such, control of the White house by a given party is not strongly correlated with market returns one way or the other. There are stronger structural forces like debt and demographics that drive market returns overtime. It is how politicians deal with these structural realities that matters.

Should you change your investment plan?

We recognize that presidential and legislative actions can translate into changes in polices which can influence the investing landscape, but right now it is still too early to tell. There are numerous policy decisions that can move the markets and clarity on these items will only come after the election. However, some of our preliminary observations are highlighted below.

Fiscal policy usually becomes slightly more expansionary early in a new presidential term. This trend is likely to continue under either candidate. Under the most likely election scenario Clinton will face some hurdles in her pursuit to boost infrastructure spending by $250B over the next five years financed by corporate tax reform. This would require a bipartisian deal on how to spend the money and a new system for taxing overseas earnings. Increased fiscal spending under either candidate could put upward pressure on interest rates and thus the dollar. It is also important to point out that debt fueled fiscal spending is only a temporary boost and does not guarantee organic economic growth will follow.

Global trade is another hot topic and we note that the president has significant discretion over trade policy. Either candidate could withdraw from NAFTA and other trade agreements without congressional approval. Certainly the risks are higher under Trump. There is some potential for U.S. companies that derive more domestic earnings to outperform.

There are also implications for monetary policy. Yellen’s term expires in February 2018 so the next president will need to nominate the next Fed chair. Clinton would likely nominate Yellen for another term, but Trump certainly would not. The financial markets would probably view a Trump victory as having slightly hawkish implications.

There is much more to consider, but again it is still too early to make changes to your investment plan. There are too many unknowns – both unknown election results and unknown policy implications. So you have to wait for some clarity before you can objectively assess the impacts to economic growth and earnings.

Making drastic changes to your investment plan now actually increases your risk of falling short of your investing goals because the odds of making an accurate call and timing it correctly are very slim! Objectively assessing policy changes that meaningfully impact economic growth and earnings is a more prudent approach.

Right now, both candidates anti-trade and anti-business rhetoric on the campaign trail does little to change our structural outlook for modest global economic growth.

Instead of creating a list of things to worry about, the list below outlines a more productive process:

  1. Create reasonable market expectations for future returns and risk.
  2. Create a plan based on those expectations and your unique circumstances.
  3. Remain disciplined to the specified plan.

This is the process that APCM uses with its clients every day to help them achieve their investment goals.

Brandy Niclai, CFA®
Chief Investment Officer – Multi Asset Strategies


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