Vote at the Polls, Not with Your Investment Portfolio

As I was watching game 7 of the World Series the other night, I knew there could only be one winner of the game and the overall series, and I was OK with either team being crowned champion, as both the Cubs and the Indians were long overdue to lift the curse overhanging each team. I offer a hearty congratulation to the Cubs and their legions of dedicated fans.

Winning in baseball seems way more civilized than what we’ve seen in the Presidential race. We knew it would be ugly, but it’s worse than that and now both sides are pulling out scorched earth negative ads in the waning days of the election, Tuesday, November 8th.

A week or two ago, literally most pundits and voters alike were all concluding that Hillary Clinton was heading for not just an election win but a landslide victory. Now with polls basically a toss-up, uncertainty over the outcome is upsetting investors and they’re selling their investment funds.

One of the key reasons why angst is mounting is because investors believe that the combination of the continued investigation around Clinton’s emails and Trump’s potential unwillingness to concede could create a rather messy post-election situation. And, there’s no shortage of attention on what Trump or Clinton would do as President.

Living in California, I feel there are way more pressing matters – 17 state propositions and 24 propositions in San Francisco (collectively, nearly 550 pages of voter guides for me to peruse). Regardless of the Presidential race (let alone a few tight Senate races across the country), voters are ready to make some big changes locally and at the state level.

As for investors, uncertainty and nervousness is reaching a crescendo in the final pre-election days. Unfortunately, the election noise is blocking out some positives in the economy and corporate results.

3rd quarter earnings season is basically over, and it was a pretty good one. According to FactSet, 85% of the companies in the S&P 500 have reported earnings. The blended earnings growth rate for the S&P 500 is 2.7%. If that reported growth in earnings holds for the quarter, it will mark the first time the index has seen year-over-year growth in earnings since the 1st quarter of 2015, ending a 5 quarter negative trend.

Additionally, the latest batch of U.S. economic data doesn’t appear to foreshadow an imminent recession, which would typically lead to a bear market (20% correction) — consumer confidence (while shaken by political theatrics) has remained strong; housing looks good; the labor market is resilient; and wages are finally starting to rise (+2.8% year-over-year). Additionally, we’ve seen both revolving consumer credit and bank loans increase, indicating consumers are becoming more comfortable in taking on debt. None of this portends that anything bad, economically, looms on the horizon.

sp-tumbles-below-technical-levelHowever, given all of the anxiety around the upcoming election this Tuesday, investors’ fears have weighed on U.S. and global markets. U.S. stocks (as measured by the S&P 500) have fallen to their lowest levels since July, breaking below chart levels that have held for four months (as shown in the accompanying graphic). Concerns over Presidential and Congressional elections as well as an impending Federal Reserve rate hike in December have stoked investors’ desire to move to the sidelines and sit idly in cash.

Somewhat offsetting this negative trend was data on the labor market (out this past Friday morning, Nov. 4th) that showed solid progress at this stage of the business cycle. And stocks have dropped to a potentially oversold territory where the forward 12-month P/E ratio for the S&P 500 is 15.9 (based on the S&P 500’s closing price of 2,089 on Thursday, November 3rd, according to FactSet).

Uncertain times typically provoke investor concern and an urge to fiddle with portfolios and the 2016 Presidential election season seems to be heightening that trend. According to new research from BlackRock (one of the world’s largest asset managers and owner of iShares ETFs), in the run-up to the presidential election nearly 2/3 (63%) of Americans have made portfolio decisions in direct response to election uncertainty. Some of those decisions, however, might be ill-suited to long-term realities.

Research by BlackRock makes clear that many investors pondering the election’s potential impact could benefit, over the long term as well as now, from reviewing some portfolio essentials.

BlackRock recently surveyed more than 1,600 Americans, ages 25-74, on topics ranging from their financial future and investment concerns to portfolio changes, with special emphasis on the 2016 election. You can find the full extent of the survey here — BlackRock Investor Pulse Survey: Americans View Presidential Election As Pivotal For Investing, But Staying Focused On The Long-Term.

There’s no question that the election is much on the minds of American investors. About 1/3 feel it poses a threat to their financial future; 3/4 believe it will have a greater impact on their personal finances than the 2008 election (the last time there was no incumbent president running).

Furthermore in their study, nearly 6 in 10 also say the potential impact on their savings and investments will be an important factor in their vote. Many aren’t waiting until the election to see how that impact plays out. Among Americans saying they’ve already made an election-driven portfolio change, the most likely move has been classic risk off behavior: A net 12% of Americans said they’ve added to cash or savings accounts.

An appropriate cash allocation is part of many good investment strategies, but the fact remains that such positions earn investors very little to nothing in the current market environment. Compounding the potential problem is that, for many, cash allocations are already quite high — about 67% percent of personal portfolios overall. Even millennials, seemingly best positioned to shoulder long-term investment risk,  are over-allocated to low-yielding cash; it represents 69% of their portfolios (according to BlackRock).

For many Americans, then, an affinity for cash seems not only a short-term reaction to election uncertainty, but also a longer-term portfolio commitment, with potentially troublesome implications for achieving long-term goals of wealth accumulation.

While this Presidential race is having an outsized impact on investor behavior; historically, most people let their political fervor drive them to the polls but not out of the market.

If theirs is a positive spin on all of this, it’s that many Americans have bigger fish to fry. Again, according to the study, they have not lost focus on long-term issues that arguably have even greater impact on their finances — higher than the election on the list of perceived threats to their financial future are the high cost of living (52%), health-care costs (46%), Social Security changes (40%) and the state of the American economy (36%).

When it comes to politics, investors need to vote at the ballot box, not with their portfolios. Investors pulling out of the market in response to their fears of a Clinton or a Trump presidency isn’t a good idea, even though both candidates elicit intense reactions.

Our investments should be driven primarily by our own personal circumstances, not our political convictions. Short-term thinking rarely helps us meet our long-term financial goals.

Unfortunately, political campaigns engage our emotions. When it comes to investing, though, emotions aren’t usually very helpful. This extraordinary election gives us an extraordinary opportunity to keep calm and invest rationally.

With election day upon us, it remains an anxious time for investors. But that offers up an opportunity for advisors in providing guidance as the divisiveness we’ve witnessed won’t dissipate post-election. In fact, about ½ (52%) of all Americans—and 72% of advised Americans—say that market volatility this year has made them more interested in professional financial advice.

Author: EricLinser

Eric Linser, CFA, is a San Francisco-based Private Wealth Manager with Green Valley Wealth Advisors *, an independent registered investment advisory (RIA) firm. Eric’s expertise is in providing comprehensive wealth management services such as investment counseling, financial planning, and retirement plan services to individuals, families, businesses, and foundations. A particular focus is on generating income for retirees, and keeping savers on track to fund future goals. For over two decades, Eric has helped provide wealth planning guidance so that his clients could achieve financially secure retirements. He is trained, experienced and credentialed to design and execute a plan that best meet your aims. Plan for your future; invest in what matters. *Green Valley Wealth Advisors offers investment advisory services through Naples Asset Management Company, LLC, a federally registered investment advisor (CRD #133978)

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