Politics, policies and profits: What’s the truth about markets and elections? In the run-up to the Brexit referendum, the Organisation for Economic Co-Operation and Development (OECD) warned Britons that a vote to leave the EU could have a catastrophic impact on the global economy. Yet, despite an immediate post-vote plummet in global equity markets, a mere three weeks after the Brexit referendum, both the FTSE and S&P were back near all-time highs.
In a similar fashion, many well-respected economic pundits cautioned that the election of President Trump would signal the end of the bull market. After all, the market hates uncertainty, right? And that’s something that an outsider like Trump could deliver. Yet, since his election, the S&P 500 has gained more than 13 percent, with the DJIA climbing 16 percent and NASDAQ soaring 18 percent.1
So much for market prognostications based on politics!
TRUST YOUR FINANCIAL PLAN
If the study of behavioral finance has taught us anything, it’s that when it comes to our money, we all tend to act irrationally. We give in to impulses that run counter to the core tenets of sound financial planning, like risk management and diversification.
We also tend to listen to CNBC, CNN or Fox News and inevitably allow political biases to color our investment decisions. The results based on these decisions are typically far from optimal. Just ask those that have been on the sidelines during the post-election rally.
But political risk is just one of many risks that investors must consider. Making a decision to dramatically shift your portfolio based on just one such factor is a fool’s errand. Politics has and will have little predictive value when it comes to subsequent market performance.
The simple truth is that political administrations are in power for an exceedingly short period of time. Your investment strategy, on the other hand, should be designed to last a lifetime. And while an administration’s economic and tax policies can have the potential to fuel or impede economic growth, over the long haul the cyclical nature of the market will prevail.
So, rather than obsess over which party is in power, investors are far better served by focusing on fundamentals, where we are in the current economic cycle and the current global economic conditions.
Those are the factors that should dictate the subtle shifts you, as an investor, make to your allocation strategy. Most importantly, you should work closely with your advisor to establish a comprehensive plan that addresses both your short-term needs and long-term goals. Continue to monitor and periodically adjust your plan based on your changing personal circumstances and certain macroeconomic factors.
Ultimately, no amount of financial information will allow you to predict the day-to-day movements of markets. Only by establishing and adhering to a clearly-defined, goals-based financial plan, will your natural inclination to allow short-term emotions to derail your long-term goals be substantially reduced.
1 As of the market close on June 16, 2017.
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