We have received a few calls from clients who are worried about the outcome of this year’s presidential election. Regardless of political affiliation, these clients believe that one or both of the current presumptive candidates could be disastrous for the economy and markets. Some have even suggested selling everything and going to cash while we wait for the drama to unfold. Are they right to worry?
Probably. Both leading Presidential candidates promise significant change for many significant issues like trade, defense, spending and taxation. No doubt the inflammatory rhetoric during the course of the campaigns could have a deleterious effect on investor sentiment, but investors need to focus on investing. Long-term goals and the fundamental merits of one’s individual investments always need to be top priorities. In the past 20 years the economy and markets have withstood and even thrived in the face of many events that had many investors running for the hills. Reflect for a moment. How did you think the stock market would react when President Clinton was impeached in December, 1998 (Dow 9,181)? How about following the Y2K transition (Dow 11,497)? What about after the 9/11 attacks (Dow 8,847)? The Iraq invasion (Dow 10,403)? Or when the federal government had to step in and rescue the banks and auto companies (Dow 10,850)? Or in April 2016 (Dow 17,733)?
Stocks have endured a good deal of volatility over time, but the long term trend based on an increasing US economy, expanding US corporations, and a growing global economy has taken stock prices higher. Some of the strongest bull markets in history have come in the face of or on the heels of very intense challenges. And while it certainly doesn’t happen every time we are faced with an unsettling backdrop, there is more than enough evidence to keep us humble (and fully invested).
Now imagine what your long-term portfolio returns would have been if you had sold everything prior to one of these events. When would you have gotten back in? How much of the rebound would you have missed? Numerous studies have been conducted to demonstrate the disastrous effects of missing just a few of the best-performing days over a long period of time. According to one study by JP Morgan Asset Management, an S&P 500 total return of 8.18% annually from 1996 through 2015 would have decreased to just 4.49% if you had missed the 10 best-performing days. If you had missed the 30 best-performing days over this 20-year period, your annual return would have dropped to -0.05%!
For all of the wailing and gnashing of teeth bombarding the viewers, readers, and listeners of modern media, this noise, too, will pass. My old friend John Whitmore who ran Bessemer Trust for many years says, “For all of the predictions of global annihilation I’ve heard over the years, most have fallen a bit short. And if this current unpleasantness passes, then you probably want to hold some stocks.”
For now it seems the markets agree. Despite a nasty start to the year, which incidentally had very little to do with the presidential election, stocks have bounced back hard and are now within spitting distance of all-time highs. More importantly, this rapid ascent happened just as US voters have whittled down the field to the two candidates for whom passions run high, both pro and con. Funny how that works sometimes. My best explanation is that the single-biggest factor governing stock prices continues to be the monetary support from the Fed and other central banks across the world. As long as investors have this reassurance, call it the Yellen “put”, they are unlikely to pack up and head for the hills. And given the widespread concerns about the coming election (combined with continued lackluster economic data), is it likely the Fed will take away the punch bowl in earnest any time soon?
But if the Fed is the primary market support, it means there is another concern on the horizon that investors will have to navigate, perhaps long after the new president has been elected. Ultimately, the markets must face the music of reduced Fed monetary accommodation. Our hope is that when this time comes, a more collegial, more mature Congress will be in a better position to provide much needed stewardship of the nation’s economy and affairs. But that is a subject for another day…
Navigating the present means concentrating on long-term goals and the fundamental merits of our individual holdings. The virtues of a calm head and steady hand cannot be over-stated.