Election Jitters

November has started out to be quite the month. So far:

  • The market has been down 7 days in a row, something that’s happened only 4 times the last 20 years
  • Oil has fallen from a high of $52 to $45 a barrel as an OPEC production cut seems less likely
  • The Presidential campaigns continue to take bizarre turns with both parties
  • And the Cubs won the World Series for the first time since 1908

The bottom line is the S&P 500 has been consolidating since its highs in August. As of today it’s down about 4% off these highs, and it wouldn’t surprise us to see the market correct a bit more. Investors have been unwilling to push stocks higher as they await:

  • The conclusion of 3rd quarter corporate earnings
  • Oil price stabilization
  • The conclusion of the Presidential and Congressional elections

Let’s focus on the elections and how they could potentially affect the markets. Right now, the polls still favor Clinton winning the presidency, but the margin of victory being predicted has narrowed quite dramatically after the FBI decided to reopen the Clinton email investigation. Current consensus thinking for now believes:

The market will take a Clinton victory in stride since she’s a known political entity and begin to focus on the fundamentals again, which are getting better. The market likes continuity and investors could expect a relief rally if she wins.

A Trump victory would bring an element of uncertainty into the markets; investors just aren’t sure what he would bring to the political arena. This uncertainty would most likely lead to a market correction that, in our opinion, would be short lived.

Conventional thinking is that Republicans are better for the markets, but historically markets have performed better under Democratic presidents. Analysts at S&P Capital IQ have found that since 1945 the average annual gain under the Democrats was 9.7%, while under the Republicans it was 6.7%.

The most important question to ask is, “Do election results drive these returns or do the trajectories of the economies and markets already in place drive returns?” Our belief is that politicians tend to INHERIT versus INFLUENCE the stock markets. Proof in point: The poor returns of the Richard Nixon and George Bush eras had more to do with the Arab oil embargo and financial crisis respectively than Republican initiatives. Likewise, the excellent returns of the Barack Obama era most likely were due to the fact he came into office right after the severe market correction of 2008, rather than his party’s initiatives.

This doesn’t mean we shouldn’t be conscious of which party holds office. Certain political initiatives of either a Democratic or Republican administration can weigh on (or favor) certain sectors within the markets. A Clinton administration would weigh on the drug/biotech manufacturers (continued attack on high drug prices) and financial stocks (continued regulation), while it could be favorable for the alternative energy sectors. A Trump win would likely favor the financial, healthcare and defense sectors and be detrimental to the manufacturing sector.

Regardless of who wins, most political strategists predict we’ll still have a Republican House and a Democratic Senate. The checks and balances that a split Congress brings to the table is a constructive setting for stock markets.

Our view is that once the elections are over the market will once again begin to assess the fundamentals. We think these fundamentals are encouraging as we look at an economy that continues to expand, earnings growth that is inflecting from negative to positive and valuations that are not cheap, but reasonable. Finally, we encourage investors to avoid mixing their political feelings and their portfolio decisions; we’ve seen too many negative outcomes when investors mix the two.

To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222

Posted on November 3, 2016
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