The President’s EffectJan 01, 2017 08:30AM ● By Jason Huddle
The President's Effect
Following the election of Donald Trump as our next president, the U.S. Stock Market dipped dramatically, then rebounded to record highs with a 600-point gain (3.2%) in three days. The NASDAQ and the S&P also initially lost, then gained, value.
Not only Americans, but people all over the globe, are affected by the volatility of the U.S. Stock Market and the impact on our economy whenever political change occurs, especially when a new president takes office. It is in the midst of elections and political change that financial consultants like me are asked the same questions from clients, business associates, family and friends:
• What effect will election results have on the economy?
• Will my pocketbook be affected by changes to health care, taxes or our laws?
• Should I be making changes in my IRA, 401k and other investments?
With a politically divided country and Congress, these questions are even more challenging to answer. The choices that President-Elect Trump and Congress make for cabinet positions and advisors, on policies or law, and in fulfilling campaign promises will, of course, have an impact on the growth or drop in our Gross Domestic Product (GDP), which is a commonly used measure of how well our economy is doing.
One example of political changes that will impact our wallets is health care. Trump has said that he will repeal, then overhaul, the Affordable Care Act (Obamacare). While many who qualify have been helped in positive ways by the act, many here in North Carolina suffer under the extremely high premiums.
Those who do not qualify for a government subsidy – or a large enough one – become burdened with higher health care costs, resulting in less spending on other goods and services, which could result in having a negative effect on our economy.
So, what Congress does and what the president signs into law could result in lower premiums, thus putting money back into the hands of individuals and small businesses. This could, naturally, lead to economic growth, which in turn is a catalyst for lower unemployment, higher wages and a better standard of living.
Another example is any proposed changes to our tax laws on our citizens and businesses. Regardless of opinions about the effect that specific politicians and policies will have on our economy, the key to sound financial investing is that we should not let it affect how we invest.
The first thing to know about the Stock Market is that it is forward looking. All the questions about what will or will not happen with the economy are already factored into the price of stocks. It is only future and “unknowable” knowledge that will affect those prices, and nobody can know such information in advance.
This is where many market “experts” – talking heads on TV – and the media play a negative role by seeming to know what will happen next, resulting in people taking actions that can derail them from a prudent investment strategy. The poor track records of such gurus clearly indicate their inability to predict if a certain stock or market will lose or gain value.
The second thing to know is that the performance of our economy is not strongly correlated with Stock Market returns. Very commonly, one’s perceptions rarely align with reality. There are many times in history where Stock Market returns were good, sometimes excellent, during a recession or following major U.S. or international events.
On the other hand, there have been times during good economic runs where the Stock Market has performed poorly. Making decisions based on predicting – or working with an advisor who does – most commonly results in more risk and unmet expectations.
To be truly wise, do not let who is in the Oval Office affect how you invest. Do not buy into the myth that the president in office or the state of the economy is a true indicator of how the Stock Market will perform.
How investors can avoid the wrong moves:
• Do not pick individual stocks but, instead, own a broad array of them all.
• Do not try to time the market.
• Do not let other people do this with your money.
What people should do is focus on what they can control. Focus on what is the correct allocation and proper diversification for your money and all your accounts from the start. Consider when you will need money for emergency reserves, medical bills or short-term goals like income for retirement, purchasing a car or paying college bills. Those funds should be invested in cash and short-term bonds, and protecting those assets from short-term losses due to volatility. For money to be invested for use later in life, adding a diversified portfolio of stocks invested globally becomes appropriate.
It is common for people to have accounts invested across several different asset allocation models to have a certain amount of money available for near and far-range goals. Having assets in various allocations is the best bet, based on when you’ll need it. By investing this way, you are already accounting for the issues discussed in this article and are prepared for the uncertainty that comes with any new presidency or political decisions.
At those times, just remind yourself that your strategy is sound and the prudent thing to do is “stay the course!” Yes, this may be hard to do, but has proven to be the right choice.
As the policies put in place by our president and Congress can impact our economy, resulting in either growth or stagnation, it is important to get involved and pay attention to what our elected officials are doing.
When it comes to investing, though, there is one prediction I will make: U.S. and global stock markets will most likely continue to be volatile regardless of who’s in control of the government but, over time, stocks should still be the best investment vehicle for growth.
The question is how to have a positive investing experience and greater peace of mind. One way is by focusing on proper allocation and diversification up front. The other is to not rely on speculative guesses and hasty reactions to passing events or predictions. Hopefully, this article has equipped you to choose the wiser course that makes the most sense for you.
Article by: Keith Laibson
Photo Courtesy: Michael A. Anderson Photography