As you may know, I am currently on a 15-day holiday sailing from Amsterdam
down the Rheine, the Main, and the Danube rivers to Budapest. Even though I
am on holiday, I wanted to give you a couple of thoughts as we enter the
summit of the political elections.
With the Republican National Convention and Democratic Conventions this
month, there is a great deal of sound and fury in the media about
presidential candidates and their effect on business and the markets. The
presumption is that future economic and financial performance is highly
contingent upon which party occupies the White House. But is it?
Media reports may lead you to conclude that your financial decisions should
be influenced by electoral outcomes, when in fact nothing could be further
from the truth. Our own process relies on macroeconomic and financial
fundamentals to guide our investment decisions—electoral outcomes only enter
into our decision-making process indirectly, through their demonstrated
effects on economic and market fundamentals.
Given these conditions, let's review what academic research and years of
experience tell us about elections and financial markets:
"Betting" your portfolio on electoral outcomes is a fool's game. Not only
would you have to predict the winner of the election, but you would also
have to accurately gauge which markets, sectors, and individual securities
are likely to benefit from your anticipated result.
Next, you must get the timing of your trade right. For example, consider
that if you are able to accurately divine answers to the questions above,
other investors are likely to have done so as well. As a result, any
potential benefit from your election trade may well have already been
arbitraged1 away! Said differently, the market likely has already
discounted the probability of your candidate winning. This means that even
if you guess right and can predict the political and economic winner of the
election, you may not reap any financial benefits. In fact, it is possible
that the market may move in the opposite direction depending on how much was
already discounted in asset prices.
There is a great deal of academic research examining the relationship
between the economic cycle and the political cycle. And the conclusion of
virtually all of it is the same: No one party (Republican or Democrat) is
consistently better or worse for stocks, bonds, or economic sectors than the
other - at least with any degree of statistical significance.
IT'S NOT WHO WINS, IT'S HOW YOU PLAY THE GAME
Here is what we can say with a high degree of certainty: Even if we knew the
electoral result ahead of time, this is not sufficient for a viable
investment strategy. Instead, we would argue that investors would do well to
tune out the electoral echo chamber and focus on developing a
risk-appropriate, sustainable saving and investing plan.
Certainly, we believe a balanced, diversified approach gives investors the
best opportunity to ride out volatile market conditions and stick to their
financial plan. One reason this is true is that it takes prediction out of
your investing equation and puts the focus on the process underpinning your
ultimate financial success. And in any event, we believe a well-diversified
portfolio is one best positioned to succeed under a range of financial,
economic, and market conditions, as well as electoral outcomes.
If you have comments or questions on the information in these
as usual feel free to call our offices.
1 Arbitrage is the purchase and nearly simultaneous sale of
assets in different markets to profit from momentary price discrepancies..
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Regards, W. Edward Newton Jr.,
Certified Financial Planner
W. Edward Newton Jr., CFP |
Certified Financial Planner
13850 Ballantyne Corporate Place, Suite 500
Charlotte, North Carolina 28277 Phone: (704) 552-8689 | Email: