The Independent Market Observer

The Election and Market Worries

Posted by Brad McMillan, CFA®, CFP®

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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.

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