2016 Presidential Election and the Markets

No matter the results, this is certainly turning out to be an “interesting” election. One of the things I find intriguing, is the willingness of financial “experts” and pundits to make predictions about the economic and financial ramifications of electing either candidate. Predicting the markets is fraught with difficulties at the best of times. Predicting lasting market behavior based on campaign promises and fluid party platforms is impossible.

The summary of pundit prognostications below does NOT reflect my views, but it does reflect the sort of noise I hear daily from market timers and day traders (a high proportion traditionally lean toward the Republican Party).

On a Clinton Victory
What reaction can we expect: Mild relief, to include a rally in stocks and bonds, but nothing particularly bullish though we expect to regain at least our September 30th gains. Expect little change in oil/gold and, similarly, little change in the value of the US dollar by year-end.

Perceived winners: Hospitals (no Obamacare repeal or replacement, maybe some small tweaks); small businesses (new tax breaks); alternative energy (continued investment in alternative energy programs).

Perceived losers: Biotech/pharma (fears of regulation/price ceilings); energy & coal (increased environmental regulation reducing coal and fossil fuel production); private prisons (Clinton wants to shut them down).

On a Trump Victory
What reaction can we expect: Stocks: a selloff lasting into the New Year. Bonds: Treasuries lower in the near term, but not a large change. Dollar: lower as markets take in the cancellation or renegotiation of major trade deals. Gold/Oil: both up on uncertainty.

Perceived winners: Coal (anticipating reduced regulation on coal production and sales); overall energy sector (in a relaxed regulatory environment); pharma/biotech (little or no risk of price controls or ceilings); banks (potentially higher rates, rollback of certain Dodd-Frank regulations).

Perceived losers: Hospitals (changes to healthcare law, including repeal of Obamacare); alternative energy (less funding and support for alternative programs and a return to energy reliance on oil/coal).

For what it’s worth, at the time this goes to press [October 31] online betting sites show a 70% probability that the Democrats will win the Senate and Hillary Clinton a 75% chance of winning the presidency. The media, on the other hand, suggests that there are ways for Donald Trump to garner enough Electoral College votes for an upset victory. This additional uncertainty will have potential market consequences until the end of election day.

As investors, as Americans simply trying to decide how to manage our finances, what do we surmise from all this prognostication? Basically, don’t lose perspective. Our thinking should change very little since our long-term goals have not changed. In 2012, the S&P 500 dropped 7% ahead of and after the election. The level of fear so far indicates that in 2016 we may see a similar drop which will provide another buying opportunity. Personally, though I understand why these predictions are being made I do not believe it is possible to predict market direction in the long-term. Storms come and go and staying the course is safest until the facts are in. Throughout, we remain true to our goals – rebalance as necessary and stick to a well-diversified portfolio.

Edi Alvarez, CFP®


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