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Predicting Election Effect on Investments

hepburnNo matter which candidate is elected president this month by American voters, financial advisor Will Hepburn predicts a sell-off in 2017.

“I don’t have a crystal ball, but I am a student of market history, and the first year of a presidential cycle brings a lot of governmental change,” explained Hepburn, president of Hepburn Capital Management in Prescott. “And change is what makes investors nervous.”

It is a given that investors’ moods drive markets up and down. Witness the fact that comfortable investors buy, and uneasy investors hold off or sell. Demand for shares lifts values skyward, while overabundance propels them downward. That is the picture from local investment advisors, such as Hepburn, who recently shared insights regarding the markets’ potential reaction to this month’s presidential election.

Pre-election patterns of increasing volatility have “tended to spike again soon after an election and have typically peaked just after the election,” according to Eric B. Fairbanks, Certified Financial Planner (CFP), Charted Financial Consultant (ChFC), Private Wealth Advisor at Ameriprise Financial in Prescott. “The new president tends to make big statements after taking office, causing markets to adjust. As investors become more comfortable with the first 90-day plan, and those 90 days become more transparent, volatility has tended to calm significantly.”

That shorter-term volatility generally has given way to longer run positive returns over most post-election decades. In 17 of 18 U.S. presidential elections in the past 80 years, a $10,000 investment in the Standard & Poor’s (S&P) 500 Index at the beginning of each election year would have gained value over 10 years. That is according to the Sept. 30 issue of “Investor News” from American Funds. Fourteen of those identified periods would have produced a doubling of that theoretical investment, along with a few instances of tripling.

Only one case of declining value would have occurred in those 80 years and 18 presidential elections, American Funds states, referencing George W. Bush’s win in 2000. The “dot com” crash that year and the financial meltdown in 2008 generated a “lost decade of stocks.”

Just the opposite would have materialized with that hypothetical $10,000 investment under the presidency of George H.W. Bush. In the 10 years following the elder Bush’s election in 1988, American Funds estimates that a hypothetical $10,000 would have jumped in value to $52,448.

Focusing on the present, what could be expected from either a Hillary Clinton or Donald Trump victory this month? Hepburn anticipated what might occur beyond the typical first-year market weakness under each candidate.

“I would expect a Clinton presidency to bring continued government regulation, leading to more slow growth years,” Hepburn explained. “Since the 2000s began, the S&P 500 has averaged a little over four percent per year, with dividends included. That is slow growth.”

Hepburn contrasted that Clinton-inspired scenario with a Trump presidency, which “could very well usher in a sharp recession as greater changes — such as deregulation of various industries — [could] create even more uncertainty among buyers than Clinton’s plans would. However, this recession [might] also be followed by long economic boom like the Reagan reforms created after the economic malaise of the 1970s, as [Trump] deregulates and frees up business.”

Fairbanks offered three things to keep in mind: 1) higher volatility leading up to the election; 2) lower interest rate risk; and 3) the importance of diversification.

“It is important to stay well-diversified across asset classes with a mix of stocks, bonds and alternative investments,” Fairbanks recommended. “The combination of a contentious presidential race, seasonal trends that typically see increasing volatility in September and October – as well as increasing volatility in the European Banking sector – leads us to caution against the complacency that can result from extended periods of abnormally low volatility [which we’ve experienced lately].”

Hepburn noted that “traditional investments and traditional investment advice are becoming less and less effective because the markets are experiencing conditions never seen before. The most important thing an investor can have in their portfolio is flexibility. I advise all of my clients to hold investments that adapt to changing markets.” FBN


By Sue Marceau, FBN

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