How Will the Election Affect Your Investments?

Next week I’m going to be traveling to the MoneyShow San Francisco, so I probably won’t send an email report or post a Bob’s Journal.

Now that all the political parties have selected their nominees for president and vice president, we’re starting to see financial publications and websites speculating about what will happen to the economy and investments under the different possible administrations. (Most of these speculations are limited to only the Democratic and Republican candidates, ignoring the Libertarian and Green Parties.) We’re going to see a lot more of these speculations in coming weeks.

For example, Barron’s ran two political articles in the current issue. One article focused on which stock sectors would do well under a Hillary Clinton administration. The article says stocks generally should do well under a Clinton presidency. Winners forecast by Barron’s are health care (except drug and biotechnology companies), alternative energy and defense. Financial stocks were expected to do poorly, as were energy companies other than alternative energy.

The other article focused on a possible Trump presidency. It argued that stocks would likely decline leading up to and shortly after a Trump election. The reasoning was that Trump would represent a high level of uncertainty for investors and that some of Trump’s proposals, such as trade restrictions, could be negative for the economy and at least some companies. Winning sectors would be health care (except hospital stocks), financial services, energy and defense.

As with other forecasts, I urge you to ignore these or treat them as entertainment. There are several reasons I recommend this.

Presidents, especially newly-elected presidents, aren’t as powerful as such forecasts imply. Congress matters a lot. The Barron’s pieces emphasize that the forecasts assume Republicans will control at least the House of Representatives, and state that the results would be different if Democrats controlled both houses of Congress along with the presidency. You can’t develop a strategy without knowing what the make-up of Congress will be and how the new president plans to work with, or not work with, Congress.

Also, campaign statements aren’t a good basis for knowing how someone will act in office. Neither of the major party candidates has been burdened by a history of consistency or clear philosophical leanings.

Another point to consider is that the election results aren’t likely to be a surprise. A too-close-to-call election is a possibility, but most of the time the polls accurately anticipate the winner. So, market prices are likely to adjust in the weeks leading up to Election Day. Markets are going to change after a candidate’s victory only if the election result is a surprise.

I remember how the market behaved after Bill Clinton was elected in 1992. There were a great deal of forecasts saying that stocks in general and defense stocks in particular would do poorly. What were then called green energy and other environmental stocks would do well. There even were a few newsletters created to exploit the unique profit opportunities of the Clinton presidency. All those forecasts were wrong, and the newsletters folded after a short time.

I recommend basing your investment decisions and financial strategies on the fundamental factors that matter to the markets. And be sure likely changes aren’t already reflected in market prices.

The Data

Last Friday’s Retail Sales report was a good example of why we look behind the headlines before drawing conclusions.

The headline was negative. Retail sales were flat, but after excluding autos they declined. This was after months of mostly strong increases in household spending. But let’s peek behind the headlines.

The prior months’ strong sales increases were revised even higher. Also, a big reason for the decline was lower gas prices. The retail sales report is based on dollars of sales, not volume or quantity. When the price of gas at the pump declines, that drags down the retail sales number even when consumers still are spending. When gas prices are excluded, sales rose at an annualized 2.2% rate.

Another factor to consider is the rapid shift of consumers to online shopping. Many traditional retail sales measures don’t fully capture online sales. When all the data are considered, households are in decent shape and are spending money. It’s not like the pre-2007 period, but spending is strong and steady.

Consumer Sentiment, as measured by the University of Michigan, held steady in the mid-month flash reading. Consumers seem in a quandary. They were less content with current conditions but their future outlook was more optimistic.

Inflation’s foothold in producer prices paused, or perhaps came to a halt, after three months of gains. The Producer Price Index declined 0.4% in July. Even after excluding food and energy, it still declined 0.3%. Producer Prices have been the lowest of all inflation indexes for some time.

Consumer Price Indexes showed no change for July, due largely to sharp decreases in energy and food. But even after excluding food and energy, the month’s gain was only 0.1%. Over 12 months, after excluding food and energy, the CPI increased 2.2%.

I don’t take this as a sign that inflation has peaked for this cycle. Services inflation remains near post-crisis highs, and wage growth continues to increase. These were offset in the latest report by declines in energy, clothing and other goods that tend to have volatile prices month to month.

Key manufacturing reports came in this week indicating that the sector continues to search for a bottom, but it might not be there yet.

The Empire State Manufacturing Survey declined to 4.21 after a slight gain last month. This survey’s been up and down the last five months.

The Philadelphia Fed Business Outlook Survey appears favorable on the surface, with a reading of positive 2.0 compared to last month’s negative 2.9. But in the survey’s components, new orders and backlog orders were negative and at the lowest levels of 2016. The employment component also is negative for the eighth consecutive month.

Industrial Production increased a hefty 0.7%, though last month’s initial 0.6% gain was revised down to 0.4%. The manufacturing component increased 0.5%. Capacity utilization also saw a hefty 0.5% increase to 75.9%. Even mining was positive for the month. The downside of the report was that factory orders were weak, making it unclear how long we’ll see positive numbers for Industrial Production.

The Index of Leading Economic Indicators from The Conference Board rose 0.4%, exceeding both last month’s number and expectations. Most components of the report were strong, and it also looks like next month’s index will be strong.

Home builders continue to be optimistic about new home sales, as indicated by the Housing Market Index for NAHB. The index is back to 60 after declining earlier in the year. Anything above 50 indicates growth and optimism. The weakness in the report continues to be a lack of first-time home buyers.

Housing starts increased sharply and unexpectedly for the month, following months of slow, steady increases. But new permits declined a little, so the number of starts should slow in coming months.

New unemployment claims declined by 4,000, keeping the weekly number and the four-week average near historic lows.

The Markets

Emerging market stocks led a week of modest global stock gains, returning 0.86% for the week ended with Wednesday’s close. The All-Country World Index had a 0.59% gain. The S&P 500 gained 0.34%. The Dow Jones Industrial Average did the best of major U.S. indexes, gaining 0.53%. The Russell 2000 returned 0.45%.

Long-term bonds lost 0.67%. Investment-grade bonds lost 0.09 %. Treasury Inflation-Protected Securities (TIPS) lost 0.10%. High-yield bonds gained 0.56%.

The dollar declined 0.85%.

Energy-based commodities surged, gaining 7.23% for the week. Broad-based commodities also had a good week, gaining 3.81%. Gold lost 0.08%.

Bob’s News & Updates

For those who can’t make it personally to the MoneyShow San Francisco, August 23-25, you can view one of my presentations and more than 30 others live on the web. Log on to The MoneyShow San Francisco Virtual Event. It’s free. View the complete schedule and register free at: www.moneyshowvirtualevent.com.

On the evening of September 20, I’m scheduled to speak at the Pittsburgh chapter of the American Association of Individual Investors. Details including registration information soon should be available here.

I’ll also be at the new MoneyShow Dallas, October 20-21. I’ll provide details later.

At these events I’ll be discussing material from my widely-praised revised edition of “The New Rules of Retirement.” It covers all the financial issues related to retirement and retirement planning. Order your copy today.

Some Reading for You

Will the emerging markets rally continue? Read this analysis.

Here’s the latest on the different ways exercise improves health and how little exercise you need to make a difference.

Here’s an introduction to some people who believe the earth is flat and why they believe that.

I comment and link to these and other items on my public blog at http://www.bobcarlson.net.