Concerned About the Presidential Election?

The presidential election is coming, and investors are shifting their tired, worrisome gaze towards the fall. We’re still battling the virus and dealing with racial tensions. Now we must add the election to the mix. Each political party, and legions of supporters, are convinced that the “other” party will tank the economy and the stock market once the election is over. Is this true? Will stocks fall if Trump wins? What about Biden?

On the heels of the 2016 election, the Brookings Institute projected that stocks would fall 10% to 15% if Trump won. In a CNN article, they wrote, “almost everyone on Wall Street currently predicts Hillary Clinton will win the White House.” They added: “A Trump triumph would likely cause investors to flee stocks to the safety of gold and bonds.”[1] Trump did win, and stocks have risen 44% from election day while bonds rose 26%, and gold has increased by 41%.

^DJI_IGPUSD_^SPXBA_chart

Since 1928, there have been twenty-three elections. The average annual return during these election years has been 11.28%, and 87% of the time, stocks finished the year in positive territory.

Fidelity has done extensive research on elections and market returns. It’s fascinating data. From 1789, the stock market has generated an average annual return of 9.1% during election years. The data below shows how the stock market performed under various election scenarios according to their report.[2]

  • Republican President: Average annual return = 8.6%
  • Democratic President: Average annual return = 8.8%
  • Republican Sweep: Average annual return = 8.6%
  • Democratic Sweep: Average annual return = 8.2%
  • Republican President and Divided Congress: Average annual return = 8.7%
  • Democratic President and Divided Congress: Average annual return = 10.9%

Fidelity’s study spans 231 years, so let’s review the stock market performance, as measured by the S&P 500, for our most recent Presidents.[3]

  • William J. Clinton = 210%
  • Barack H. Obama = 182%
  • Ronald W. Reagan = 117%
  • George H.W. Bush = 51%
  • Donald J. Trump = 44%
  • Jimmy E. Carter = 28%
  • George W. Bush = -40%

The presidential election will stir up plenty of emotions and cause the stock market to gyrate considerably. However, the election will have little impact on your investment portfolio. Rather than worrying about the election, focus on your financial goals. A more significant impact on your wealth will be how much money you save and invest. If you save more than you spend, your wealth will increase. Allocating a large percentage of your assets to stocks may allow you to create generational wealth because stocks historically outperform bonds.

If you’re concerned the “other party” will destroy the market, you probably own too many stocks, or you have never completed a financial plan. A financial plan will help you determine the appropriate asset allocation so you can handle multiple market conditions. During the stock market correction this past March, we regularly checked our client’s plans to make sure their goals were still intact – and they were.

I recently talked with a client who was concerned about his rising expenses because of a home purchase. I informed him we factored in an increase in his living expenses for the next two years, so he was going to be okay. He said he was going to sleep well that night. A financial plan, your plan, will remove confusion, complexity, and worry so you can pursue things you enjoy.

Elections come and go, so don’t let political anxiety weigh you down every four years. Follow your plan, focus on your goals, save your money, invest often, diversify your assets, think long-term, and good things will happen.

Be sure to put your feet in the right place, then stand firm. ~ Abraham Lincoln

July 24, 2020

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

[1] https://money.cnn.com/2016/10/24/investing/stocks-donald-trump-hillary-clinton/ Heather Long, October 24, 2016

[2] https://www.fidelity.com/learning-center/trading-investing/markets-sectors/stock-returns-and-elections Jurrien Timmer, Director of Global Macro, Fidelity Management & Research Company

[3] https://www.forbes.com/sites/sergeiklebnikov/2020/07/23/historical-stock-market-returns-under-every-us-president/#4a589312faaf Sergie Klebnikov and Halah Touralai, Forbes Staff Writers, July 23, 2020

Battling History

The Dow Jones Industrial average has fallen 10% from its January peak of 26,616 and volatility has returned in force. The Dow has experienced 28 days with moves of more than 1%: 14 up, 14 down.  In February, the market fell more than 4% twice.

The VIX, a measure of volatility, has increased 114% this year, peaking at 50.3 in February. By comparison, it reached 80 in October 2008. The VIX, also known as the fear index, spikes when investors get nervous and frightened.

The down drafts and volatility spikes have been attributed to Trump’s proposed trade tariffs.  He currently wants to apply $100 billion in tariffs on Chinese imports.  He originally wanted global tariffs on steel and aluminum but has backed off on this and has carved out certain countries like Canada and Mexico.  Mr. Trump has said, “Trade wars are good, and easy to win.”  In a recent interview with the radio show Bernie and Sid he added: “We’ve already lost the trade war. We don’t have a trade war, we’ve lost the trade war.”  He continues, “I’m not saying there won’t be a little pain, but the market has gone up 40 percent, 42 percent so we might lose a little bit of it. But we’re going to have a much stronger country when we’re finished.”

The Dow Jones is up 25% since the Presidential Election and 239% from the March 2009 low so giving some profit back isn’t all that bad, is it?  If the market were falling because of poor fundamentals or lackluster earnings, then a little profit taking wouldn’t be a concern.  However, this isn’t the case as investors are focused on the specter of a trade war coupled with rising rates.  These two items may be too much for the market to bear.

Fortunately, or unfortunately, we have some case history with tariffs.  During the height of the depression and a few months removed from the stock market crash on October 29, 1929, the Smoot-Hawley Tariff Act was passed in June 1930.  This act applied tariffs to 20,000 imported goods.[1]

On April 15, 1929 President Herbert Hoover said, “Such a tariff not only protects the farmer in our domestic market, but also stimulates him to diversify his crop.”[2]

“In May 1930, one thousand and twenty-eight economists signed an open letter urging the president to veto the legislation – and published it in the New York Times.”[3]   The economists added that “many countries would pay us back in kind.”[4]

World economies suffered, and banks collapsed.  The Fed Reserve raised interest rates in 1928 and 1929.  The Fed was decentralized in the 20s and didn’t become a voting body until 1935. Two years after Smoot-Hawley passed, U.S. imports dropped 40%.[5]  Two dozen countries retaliated, and our imports and exports fell by two-thirds between 1929 and 1932.[6]

The Reciprocal Trade Act of 1934 gave FDR the ability to negotiate bilateral trade agreements allowing him to reduce tariffs.  This act, along with World War II, has been credited with improving our economy, restoring global trade and ending the depression.[7]

The current rhetoric is being described as a negotiating tactic designed to bring fair and free trade to China and the United States.  I hope this is the case because trade wars can escalate quickly.  Forrest fires always start with a little spark and if left unchecked, can spread to thousands of acres.

If we do engage in a prolonged trade war you won’t have to worry about the Fed raising rates because they’ll fall like they did during the Great Depression. During the Great Depression stocks, interest rates and inflation fell while T-Bills and long-term bonds rose.

Here’s how these items performed from 1929 to 1932.

The S&P 500 fell 84.8%.

Inflation fell 25.4%.

Long-term bonds rose 19.6%.

T-Bills rose 9.2%.

I’m a believer in the invisible hand and I’m hopeful China and the United States can avoid a trade war.  Hope is not a strategy so prepare yourself for more market turbulence as these two economic super-powers battle each other through social media.  The best way to inoculate yourself from the market’s turmoil is to follow your financial plan and diversify your assets.

“History doesn’t repeat itself, but it often rhymes,” ~ Mark Twain

 

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

4/10/18

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog and investments aren’t guaranteed.

 

[1] https://en.wikipedia.org/wiki/Smoot–Hawley_Tariff_Act

[2] The Forgotten Man by Amity Shlaes, 2007

[3] Ibid

[4] Ibid

[5] Ibid

[6] The Editors of the Encyclopedia of Britannica, 4/8/2018.

[7] https://en.wikipedia.org/wiki/Reciprocal_Tariff_Act

Dump the Trump Bump?      

The stock markets (all of them) continue to soar to new heights.   Since the presidential election, the Dow Jones Industrial Average is up 14.5%.   Several experts are a calling for the market to give back these gains and then some.   One advisor has called for the stock market to fall as far as 11,500 a drop of 44% from the current level.[1]  Another has called for a “$68 trillion biblical collapse.”[2]  Finally, one economist has said the stock market is currently 80% overvalued.[3]  Scary.

Is it wise to sell your investments and ride out the coming stock market decline?

Let’s look at some history.

The Standard & Poor’s 500 Index is up 20% on a year over year basis.  For the past five years, it’s up 93.3%.  During the last fifteen years, it has gained 173.2%.  Over the past twenty years it has risen 321%.  For the record, the stock market has never fallen 321%!

Looking back to 1987, a portfolio owning the Vanguard S&P 500 Index Fund and the Vanguard Total Bond Fund generated a total return of 977%.   A $100,000 investment is now worth $1,075,000.  During the past thirty years, this portfolio’s best year was in 1995 gaining 27.80%.  2008 was the worst year as it dropped 16.57%.  In this simple portfolio, you own some of the markets best performers including Apple, Microsoft, Amazon, Berkshire Hathaway and Facebook.

What should you do as the market continues to climb to new heights?   Here are few suggestions.

  1. Nothing. You don’t have to do anything.  History tells us that time in the stock market is the best way to create a mountain of money and produce generational wealth.
  2. Diversify. If 100% of your money is invested in the Dow Jones or S&P 500, move some of it to other investments like small companies, international companies or bonds.
  3. Plan. What does your financial plan say?  Have you arrived at your financial destination because of the markets rise?  If so, sell some of your equity holdings to reduce your risk exposure.
  4. Buy. If the market does drop 20% or 30%, then buy the dip.  Adding to your equity holdings when the market drops has proven to be a prudent financial strategy.
  5. Give.  If you have benefited from the rise in the market, take some gains and donate the money to your favorite cause.

Of course, no one knows what the stock market will do or when.   The best strategy is to focus on your goals, save your money and think long term.

Predicting rain doesn’t count. Building arks does. ~ Warren Buffett.

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC.  www.parrottwealth.com.

February 14, 2017

 

Note:  Your investment returns may be more or less than those posted in this blog.  Past performance is no guarantee of future results.  The financial data has been generated from the Morningstar Office Hypothetical Tool as of 2/14/17.
 

[1] http://www.cnbc.com/2016/06/22/dow-11500-is-a-matter-of-when-not-if-advisor.html, Michelle Fox, June 22, 2016,.

[2] http://thesovereigninvestor.com/exclusives/80-stock-market-crash-to-strike-in-2016/, JL Yastine, January 30, 2017.

[3] Ibid.