Contributed by Lewis J. Walker, CFP®
The Republican and Democratic conventions are over. The combatants are confirmed. Get ready for an ugly fall. The campaigns may be interesting, but they won’t be pretty. How do politics impact the stock market?
Theories, opinions, and forecasts based on history should be regarded as entertainment, not action items. Think back. Hillary Clinton was to walk to a coronation. She did not see Bernie Sanders coming, pegged initially as a socialist gadfly. The Republican establishment did not see Donald Trump coming. Early bets abounded as to how quickly he would implode! Clearly, this is not an ordinary election cycle!
Rasmussen polls dated 7/23/16 indicated that only 21% of American voters think our country is headed in the right direction, the lowest reading in three years. Hillary Clinton is in a virtual tie with Donald Trump in polls, despite massive spending on negative political ads in battleground states, outspending Trump $57 million to $4 million. Bets as to the winner in November at this point would best be settled with a coin toss.
The biggest influence on markets and voter optimism during election years is whether the economy is headed into recession or recovering from a recession. We have had a tepid recovery coming out of the 2007-2008 slump but recession fears do not seem to be a factor this go round. Rasmussen indicates that the dour mood of those surveyed revolves around attacks on police, increased racial tensions, terrorism here and abroad, and the slow recovery.
Global markets shuddered when the United Kingdom voted to leave the European Union, the so-called Brexit. Within a week or so, markets bounced back with U.S. indexes eventually moving to all-time highs. Open borders within the EU resulted in heavy migration into Great Britain. Immigration from Eastern Europe, especially former Soviet bloc countries, and lately a flood of refugees and illegal migrants fleeing Middle East chaos has, as one observer put it, “engendered a feeling of losing their cultural ‘home’ threatening social stability.” While feelings may not be as intense here given the size of the U.S., nevertheless our porous borders and illegal immigration loom large in the populist wave of voter sentiment. Fear that ISIS will plant terrorists among asylum seekers is palpable. Which candidate will convince voters that he or she has the best answers?
At the core it is still “the economy, stupid,” as James Carville, campaign strategist for Bill Clinton’s successful campaign against incumbent George H. W. Bush, famously declared in 1992. Our economy is burdened with complex regulations that stifle innovation and business expansion. Britain objected to EU bureaucrats in Brussels; American flyover country has the same problem with Washington bureaucrats.
The tax code is a complex mess. Job growth tepid. Too many have quit looking. Schools are not preparing people for the jobs of today, let alone tomorrow. Infrastructure is crumbling. Our military is plagued with aging equipment. The VA is not reformed. Health care is increasingly expensive, not cheaper and more effective as promised. The winner in November will be the one that voters in the middle, outside of the partisan base, decide has the best potential solutions to challenges. “Don’t bash the competition. Tell us what you will do to tackle our problems.” We await enlightenment.
Expect interest rates to stay at low levels for some time to come, regardless of what the Fed does or does not do this year. As analysts at Coho Partners in Berwyn, PA, recently noted, “secure and rising dividends (from stocks) are critical to growing and preserving income streams.” Profit margins may erode, the growth rate of dividend payouts may slow into 2017, but dividends still will play a meaningful role in total return.
Home prices are growing. We see signs of some stabilization in the oil patch. Most of the inflation is showing up in housing and rents, which is 42% of the inflation index weighting. With employers looking for workers with skills, expect “wages and real incomes to rise at a greater level than currently anticipated,” opine Coho analysts. Consumer spending should hold up.
In short, if you have a solid investment plan in place and adequate diversification, we say make no moves based on supposed election results. We are in uncharted political territory. Sit back and watch the spectacle. Outcomes are pure speculation presently!
Lewis Walker is a financial planning and investment strategist at Capital Insight Group; 770-441-2603. Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative and investment adviser representative of SFA which is otherwise unaffiliated with Capital Insight Group.