In this month's Economic Outlook, Chief Investment Officer Greg Sweeney gives perspectives on Federal Reserve policies, expectations for interest rates and inflation, and what's going on in national and global markets.
Presidential elections and the investment markets – it’s a topic on just about everyone’s mind, and probably one I should have addressed a month or two ago to put everyone at ease. What was that – did Sweeney just say “ease”?! Yes. Yes, I did.
Here’s the deal: If you intend on voting for one person, you will always fear that the other person gets elected instead. There is little doubt in any of our minds that if the person we vote for doesn’t get into office, there will be complete pandemonium in the markets.
Bear in mind that nearly everyone thinks this way, regardless of which candidate they support. In the end, this means about 50% of voting investors will get it their way, and 50% won’t. Which half should get their way? My point is, it really doesn’t matter much. Half of the voting investors will feel validated in their decision, and half will feel let down.
Up to this point, we have been talking about feelings, and feelings matter – at least temporarily. The markets could go through some gyrations because of potential higher taxes, higher deficit spending, continuation of trade tensions, isolation of free trade, coronavirus response, and more … whatever topic the media picks for the day or week.
What about those almost daily opinion polls that are supposed to predict election results based on surveys of respondents? I have always wondered, whose opinion is captured in these polls? How did they reach these respondents? How did the respondents have enough time to answer survey questions?
All this is to help explain why I use a 50/50 ratio between the candidates in the first paragraph, rather than the ratio the polls report. For a variety of reasons, I believe my figure is a better representation of the outcome of the election.
“Election” vs. “Markets”
Time after time, elections bring about some sort of market volatility – but when they are the only reason for the volatility, it tends to be short-lived. On top of that, there is the challenge of getting the vector and magnitude of the volatility correct. Of course, market timing (when to sell and when to reinvest) is also part of the formula.
So let’s do the math: We have a 50% chance of being correct about the outcome of the election. I will be very generous about the odds of getting the direction of the market correct and say they are also at 50%. Adding the probability of success due to market timing, I will say that is a philanthropic 25%. So, absent any other criteria, the formula for the probability of success would look like this: 0.50 x 0.50 x 0.25 = 0.065. That means our odds of this being all correct stand at 6.5% – a long way from the level of confidence I would need to make a bet.
In short, for an investor with a long-term investment outlook, election volatility is no different than any other market volatility. With appropriate allocation and diversification, this election year is simply another period to move through on the way to your long-term investment goals.
The English rock band The Who summarized this whole election process 50 years ago. Released in 1971, their song “Won’t Get Fooled Again” is about a movement to remove those in power. In the end, the newly elected regime is much the same as the one that was just escorted out. A famous line goes, “Meet the new boss … same as the old boss …”
Regardless of the outcome of the election, the reality is we all need to get on with what we do. The markets will move back toward their gravitational forces, regardless of how much politicians continue to act in their own interests.