As Election Day draws near, many people are wondering about the impact on their investment portfolios. To help address that, let's make one large assumption: The American democracy will survive and the American economy will continue to grow and provide jobs in the future.
It's an assumption that has held throughout our country's greatest modern challenges. Despite recessions and wars and panics and crises, our system has endured, the stock market has withstood the shocks — both economic and political — and we are here to make today's investment decisions with the stock market near all-time highs.
So, what can we say for certain about the stock market post-election? Nothing, except that the market hates uncertainty. And a good deal of uncertainty should be resolved after the election, judging by the latest polls.
Another factor: the potential for a Fed rate hike. Typically, the stock market doesn't like higher interest rates. Usually, the Fed pushes rates higher to stop an overheated economy. And historically that leads to a market decline. However, today's economy cannot be described as booming.
Rising rates may have a negative effect on some businesses, but they could spur banks to start lending again, creating another leg of the expansion. It is far from certain that a Fed rate hike in December would be bad for stocks. And, keep in mind, the widespread expectation of a rate hike is built into today's stock prices.
According to InvesTech Research, presidential election years are typically positive for the stock market. Since 1951, says Jim Stack, editor of InvesTech, the S&P 500 index has gained an average of 6.6 percent in presidential election years. And, he notes, despite this year's six-week opening loss, the worst in Wall Street history, the market is back on track to match historical precedent.
Stack points out that the two months prior to a presidential election generally show some softness in stock prices. However, “gains usually resume once the election is decided.”
The Northern Trust has just released its highly regarded survey of 100 professional money managers. These managers are watching the presidential election closely for its impact on portfolios. Half of those surveyed believe U.S. equities are overvalued — a record consensus.
Managers generally expect stable economic growth in the U.S. to continue. But far fewer expect U.S. GDP to accelerate in the coming year. One-third expect U.S. corporate profits to increase in coming months, while half expect stable earnings (which tend to drive stock prices).
Their stated No. 1 risk to the future is not the election; it is rising U.S. interest rates. Of managers surveyed, 71 percent expect the Fed to raise rates by December.
Managers were asked which outcome in the November elections they believe would have the greatest impact on global equity markets. Seventy-two percent said a win by Donald Trump, while 27 percent said the Democrats winning a House majority. Just 1 percent thought the election of Hillary Clinton would have such an effect.
What should you do with respect to your investments?
First, stop following those Internet warnings of disaster to come. It will take more than the election results to chase money out of America, considering the alternatives.
If you need to take a required minimum distribution from your IRA by year-end, you might not want to wait until after the election and risk selling at lower prices, no matter who wins.
But if you're a younger investor, you don't want to miss out on the future gains in the stock market. Keep investing regularly, knowing that if the market declines, lower prices will give you bargains in the long run.
That's the way it has always worked. And that's The Savage Truth.
Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.” She responds to questions on her blog at TerrySavage.com.