Worry about who you're voting for not how to position your portfolio
Jim Urquhart/Reuters
There are not many good things being said about the U.S. Presidential election these days. Words like unpredictable, scary, confusing, volatile and depressing are commonplace.
But I’m not talking about descriptions of the candidates or views on the state of the nation. These are the words voters and investors are using to describe their views of how the election is affecting the financial markets.
The political spectacle around electing our next President is inciting anxiety and despair among investors, causing them to hold tightly to their already sizeable cash allocations and consider dramatic shifts in their portfolios. And while, in some cases, this is not new behavior – investors’ wariness of the capital markets and general discomfort with uncertainty has already been well documented – a recent UBS Investor Watch survey of 2,300 wealthy investors found that the majority view this particular election as more significant than any political contest in recent history.
As a group, and regardless of party affiliation, those surveyed have much greater anxiety about how different outcomes will affect their current portfolios and their long-term financial security. Levels of concern range from moderate to expectations of a near Armageddon if voters' preferred candidate does not win.
The surprising outcomes to date and intense rhetoric of the election is leading investors to focus intently on the short-term and to ignore the long-term fundamental drivers of market performance. Because both candidates are considered controversial by many voters, investors believe Election Day will be a market-moving event. According to Investor Watch, nearly two-thirds (64%) think that if the candidate they oppose becomes President, the market will go down, and 61% think it will go up if the candidate they support wins. The vast majority are worried about the election outcome and its impact regardless of which candidate prevails.
As a result, investors have already made or are at risk of making emotional decisions about their investments. Almost half of investors (47%) are considering reducing their investments as a result of the election, and 5% have already pulled out of the markets entirely, with another 25% considering doing so at some point.
Many investors are clearly asking themselves, “What can I do to protect myself?” thinking that the answer has to be “do something” as opposed to “do nothing.” While some investors may make the right short-term calls, there is a great deal of research that demonstrates most attempts at "timing the market" are detrimental to long-term performance.
And while the unusual and erratic events of the months leading up to the general election seem likely to continue, investors may be better off focusing on whom they will vote for than aligning their portfolio to an expected election outcome.
Here’s why:
- Investors started this election cycle already on edge as a result of concerns that are an enduring consequence of the 2008-09 financial crisis. Yet holding onto cash instead of putting it to work won’t help investors grow their long-term wealth. And research has shown that Presidential contests historically have had minimal, if any, long-term impact on financial markets. Better for investors to put their faith in America's industrious people, its resilient democracy, and its appetite for progress than in any one candidate.
- The markets do not favor one political party over another. Historical analyses of market performance demonstrate that the U.S. stock market has experienced periods of success and difficulty with both Democratic and Republican presidents. Neither party can claim that the market does better under their leadership (or, conversely, that it does worse under the opposition). According to one recent study by OppenheimerFunds[1], people who invested fully regardless of which party was in power have historically generated significantly better returns compared to the Dow Jones Industrial Average than those who only invested their money when the President shared their political affiliation. Of course, past performance is not a guarantee of future results.
- The economy is in good shape. Consumer spending is increasing[2], jobs numbers are growing and wages are rising.[3] We are experiencing a slow, but steady, expansion. And, according to the Foundation for Economic Education, business and consumer spending has a more significant impact on the U.S. economy than the government does.[4]
- The Office of the President is not an absolute authority. Whoever our next President is will likely face a divided Congress, making it more likely that policy changes will be incremental rather than dramatic. And, there are independent bodies, most notably the Federal Reserve, whose actions may be just as influential on the markets as any President’s.
It's by no means easy, but investors would be best served by separating politics from investments and blocking out the noise of the election. The country is in better condition than the political rhetoric would indicate, and emotional investing is as bad as trying to time the market.
Practice patience, stick to a financial plan and focus on long-term financial goals. In the end, the election won’t be as bad as you imagine.
Sameer Aurora is head of Client Strategy & Insights at UBS Financial Services Inc. In providing wealth management services to clients, UBS offers both investment advisory and brokerage services which are separate and distinct and differ in material ways. For more information, including the different laws and contracts that govern, visit www.ubs.com/workingwithus. UBS Financial Services Inc. is a subsidiary of UBS AG. Member FINRA/SIPC.
2 http://www.cnbc.com/2016/07/29/gdp-us-economic-growth-is-close-to-zero.html
4 https://fee.org/articles/consumer-spending-drives-the-economy/
[1] http://www.cnbc.com/2016/07/29/gdp-us-economic-growth-is-close-to-zero.html
[1] https://fee.org/articles/consumer-spending-drives-the-economy/
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