Stan's World: The Trump Presidency and Your PortfolioSubmitted by S. F. Ehrlich Associates, Inc. on February 16th, 2017
February 16, 2017
An article in the New York Times1 titled “Probably a Bad Idea to Sell Just Because You Fear Trump” reminded me of a piece in MONEY Magazine that I read last summer. That article questioned how the election might impact your investments, and included two comments worth repeating...
· “People take greater risks when their party controls Washington.” Conversely, “investors affiliated with the party out of power tend to grow restless and trade securities more frequently.”
· “The fact is, stocks generally rise over time no matter who’s in charge…After the silly season is over on Nov. 8, about half the country will be elated, and nearly half will be scared. And both groups, research shows, are likely to tweak their investments accordingly. That’s when things really get risky.”
The fact that the stock market has been melting up (as opposed to melting down) has surprised many, but it’s important to reiterate why the stock market moves at all. Yes, emotion plays a part in daily moves, but for the long haul, corporate profits (or the lack thereof) will dictate overall performance. In its simplest terms, investors will pay more for a company if its profits go up, or if they believe its profits will increase.
High share prices and fears of an erratic president don’t mean the markets have to fall, even if you fear that will happen. But as the article in the Times points out, it’s easy to be blinded by your personal opinions. Take a minute to look under the hood to get a sense as to what’s moving this market, and whether the bull might continue to run.
Notes the Times: “It’s very likely there will be corporate tax cuts and deregulation, both of which benefit companies’ bottom lines in a pretty direct and measurable way. It is optimism about those policy priorities that has driven the market rally since Election Day. Throw in some extra government spending on the military and public infrastructure, and you have a recipe for speedier growth.”
But the Times also points out the “darker possibilities,” to include “a trade war that could turn into a global recession,” or a “small crisis could spiral into something bigger…”
For those who expected volatility in Washington to translate into volatility on Wall Street, it’s also interesting to note that the stock market has gone almost 90 sessions without a single daily decline of 1% or more. Barrons’ points out that hasn’t happened since 2006, and before that, 19952.
Regardless of whether or not ‘your’ candidate won or lost, if you’re nervous about Washington, that shouldn’t translate into any dramatic shifts in your approach to investments. Diversified portfolios are built with the goal of weathering storms over the short term. Diversification includes lower volatility investments, such as short-term bond funds, for those investors who don’t have the time to wait for their portfolios to fully recover after a steep drop in the equities markets. And periodic rebalancing aims to keep your equity to bond mix in check whether the markets go up or down.
Nobody can ever say that what happens in Washington won’t have an impact on your stock investments, but the market’s long history teaches us that any impact has been relatively short-lived compared to the lengthy time frame for the equity portion of your portfolio.
1 Irwin, Neil. “Probably a Bad Idea to Sell Just Because You Fear Trump.” The New York Times, 14 Feb. 2017.
2 Tan, Kopin. “The Meltup Continues.” Barron's, 13 Feb. 2017.