Portfolios and Presidents
by Jordan Kenna -
November 8, 2016
Some thoughts regarding the U.S. presidential election and your money (and mine):
The prospect of trading based off of various sound bites or data points associated with the election is very enticing. The problem is there is no historical evidence supporting the idea that applying U.S. presidential election assumptions to our portfolio, and trading accordingly, is a robust, reliable source of excess return. We could get lucky, or we could just as easily suffer a setback. While fun to chat about and speculate, it’s not a high probability shot at growing your money.
Put another way, I have a hard time imagining someone retiring early thanks to predicting the election result and the corresponding windfall trades associated with that result. True to form, my industry is likely manufacturing a Hillary or Donald Fund somewhere, and sales will probably be brisk. No sense here of what would result beyond an expensive “specialty fund,” which will likely be a carcass in five years’ time when it gets re-invented into a Weed Dispensary Dividend Fund, or whatever is marketable at that time.
There is some concern about the market declining as a result of the election outcome—there very well could be a sell off. At that point your bonds should do their job (protect) and your equities will likely go down. My sense is much of this will be driven by toxic sound bites, negative sentiment, uncertainty and emotion. Unlike the 2008 market decline, the decline will not be attributed to toxic financial assets, overstated corporate earnings and janky credit ratings—all concrete reasons for prices to decline.
Today market fundamentals are sound, but patience will be required while sentiment is poor. If the recent Brexit sell off is any indicator (described by one pundit as “best…..crisis…..ever”), perhaps not even much patience will be required. This past weekend some financial assets rallied (Asian stocks and U.S. market futures), making an exit to cash-in ahead of the election a nerve racking and possibly expensive combination. If you are going to spend/lose money, at least get some comfort in return. This brings us back to patience and awareness of the composition of your portfolio as being the best course of action going forward.
By most measures, the U.S. market can currently be described as ‘fully valued’; it’s not a bargain, but not a rip off either. Should we be faced with a meaningful sell off, I would recommend adding new cash to your U.S. equity allocation. Like every time before, we need an ugly catalyst to get a screaming deal on our U.S. stocks; happy sentiment and dirt cheap pricing are never partners. If we get the chance, hooray! Or at a minimum, you maintain your asset mix which hopefully has been designed around your comfort levels and objectives.
In 2007 a client of mine outright refused to include U.S. equities in their portfolio due to the underwhelming U.S. market results at the time, and their dislike of President Bush. The U.S. market was languishing and its inclusion in portfolios felt like an exercise in futility. However, it went on to be a major driver of portfolio results from that point forward, outperforming both Canadian and European markets—for those investors who were in attendance.
Take a look at the below single graph summary of market results and corresponding U.S. Presidents. It is a quick snapshot of history you might find interesting, and if nothing else, shows (again) how the market works in favor of the long-term investor.