The Independent Market Observer

The Election and Market Worries

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Sep 28, 2016 2:02:29 PM Leave a comment

electionShould we, as investors, be worried about the presidential election?

After spending last week talking with financial advisors and their clients, and the past couple of days thinking about the debate, it seems that’s the question on pretty much everyone’s mind.

In the long run, I think the answer is no. There have been many “critical” elections where doom was prophesied should one or the other candidate win, yet we’re still here. Many presidents have made substantial errors, and here we are. As I see it, the dire predictions surrounding the election are just the latest iteration of the apocalypse franchise.

In the short run, however, there’s reason for some concern. Policy uncertainty often hits markets, and Donald Trump is offering more policy uncertainty than any candidate in decades. As I’ve said before, this isn’t necessarily a criticism; I suspect Trump would say that disrupting the status quo is the point. Meanwhile, Hillary Clinton is seen as the less exciting candidate, as well as the one less likely to roil the markets. 

Market may move with Trump’s chances of winning

So far, most of the election-related volatility seems correlated with Trump’s chances of winning. What those chances are, however, depends a lot on the election forecast you look at.

The New York Times forecast, which shows up on my iPhone every day, puts the current odds at 70/30 in Clinton’s favor. As I write this, FiveThirtyEight, a site known for accurate political predictions, is at 55/45, also in favor of Clinton. Although she’s ahead in both, there’s a big difference between a 30-percent chance (or less than one in three) and a 45-percent chance (almost one in two).

Could there be a substantially higher chance of a Trump victory than many people think? This is the risk we need to monitor. If public perception starts shifting, it could rattle markets. Personally, I suspect the threshold could be around a 40-percent chance of a Trump win in the New York Times analysis.

The art of worrying constructively

Short-term reactions are worth planning for and keeping an eye on. But as long-term investors, we tend to do far more damage to our portfolios by overreacting than by sitting and waiting. Worrying constructively involves identifying what might happen, so that if it does, we don’t panic.

  Subscribe to the Independent Market Observer

Subscribe via Email

Crash-Test Investing

Hot Topics



New Call-to-action

Conversations

Archives

see all

Subscribe


Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®