How do you invest in a time of high political uncertainty and volatility?
We had to deal with that issue several times in the recent past, and most investors handled it the wrong way.
After months of very low volatility and what I’ve been calling complacency, investors had a wake-up call last week. A special investigator was appointed by the Department of Justice to investigate Russia’s role in last year’s U.S. elections.
That prompted speculation that President Trump might be impeached or at least wouldn’t serve his full first term. Stocks registered their largest one-day decline since before the election.
There was a different time of political uncertainty and volatility immediately after the election. Back then, many investors became enthusiastic about the prospects for higher economic growth due to new policies.
The prices of U.S. stocks rose steadily while foreign stocks declined in what was called by many the “Trump Rally” or “Trump Trade.” We saw investors almost panicking in efforts to reformulate their portfolios to reflect the new political environment.
I’m not a believer in letting political headlines have much of an influence on your investing.
Throughout the weeks after the election, I stated that the rally was an overreaction based on noise and speculation. Sure enough, the rally faded after about a month. The sharp rise in U.S. stocks paused, and international stocks recovered.
I say the same thing anytime people ask how the latest headlines will affect their investments. Recently, people have asked if the failure of Trump’s policy initiatives will cause a market decline or how the President’s leaving office before the end of his first term will affect markets.
I follow a few basic principles that work well in times of political uncertainty, as well as at other times.
First, pay attention to the data that matter to the markets. For example, the U.S. election results last November didn’t change the data.
I said to hold the positions we had before the election because they were consistent with the data that mattered. In time, the headlines and hype were overcome by the data, and our portfolios did well. Investors who followed the headlines have had to change their portfolios at least a couple of times since before the election.
Following the data means you need a process for evaluating the data and making investment decisions. Many people flounder in uncertain times because they don’t have an investment process. Instead, they follow the headlines, and the headlines stir their emotions.
Second, be diversified and balanced. I rarely recommend that our portfolios be positioned to benefit from only one market and economic outcome. Instead, we want some counterbalancing in case there’s a sharp change in the data or we misinterpret it.
Third, have mostly liquid investments. I don’t want to own too many assets that are hard to sell, especially in times of uncertainty and panic. I want us to be able to change our portfolios when the data indicate we should.
Fourth, we need to be able and willing to change our portfolios when the data change. Many investors are emotionally locked into investments after purchasing them. They find it difficult to change their portfolios.
In June’s Retirement Watch newsletter, I discussed confirmation bias. That’s when people look only at data that supports what they already believe. Confirmation bias reduces your investment returns, and it is one factor that keeps many people from changing their portfolios when they should.
I don’t know how all the investigations will turn out, and it doesn’t matter much to our investment returns. We have an investment process in place and will follow the data that matter to the markets.
We’ll probably be out of sync with the market action from time to time, as we were right after the election, but that’s because emotions and noise can influence the markets for short periods. However, those trends don’t last. Ultimately, the fundamentals reflected in the data determine the direction of markets.
This was a light week for economic data.
The monthly new home sales data normally are volatile, and the latest report is evidence of that. Despite high levels of optimism from home builders, new home sales declined 11.4% from the previous month. But the data from the two previous reports were revised sharply higher. The three-month average is pretty good and only a bit below the highest levels of this recovery. However, the report also indicated builders reduced prices about 3% to make those sales.
Existing home sales also declined from last month by 2.3% and are up only 1.6% over 12 months. Even so, the annualized rate is among the highest levels of the recovery. The good news is that prices rose 3.5% and are up 6.0% over 12 months.
The FHFA House Price Index continues to show strong price increases. Home prices were up 0.6% in the last month for a 6.2% 12-month increase.
The Richmond Fed Manufacturing Index was well below expectations, registering a 1.0. This is a steep drop from last month’s 20.0. A decline was expected, but not one this big. Most components of the survey declined sharply, except that the number of employees and wages rose. Also, expectations of manufacturers didn’t decline as much as the overall index. The manufacturers still are positive about the future.
The PMI mid-month composite flash indexes showed a small decline in manufacturing from 52.8 to 52.5 and an increase in services from 52.5 to 54.0. It is noteworthy that service sector respondents were less optimistic about the future than they were earlier in the year.
The S&P 500 rose 2.03% for the week ended with Wednesday’s close. The Dow Jones Industrial Average jumped 1.92%, while the Russell 2000 climbed 1.93%. The All-Country World Index rose 1.81%, while the emerging market equities gained 1.03%.
Long-term treasuries lost 0.04%. Investment-grade bonds slid 0.19%. Treasury Inflation-Protected Securities (TIPS) added 0.09%, while high-yield bonds appreciated 0.76%.
The dollar lost 0.75%.
Energy-based commodities rose 2.08%. Broader-based commodities gained 0.82%. Gold dropped 0.41%.
Bob’s News & Updates
IRAs are among the most valuable assets most people own. That’s why I recently conducted a webinar on IRA Changes & Strategies You MUST Know. It’s one of my most popular and important presentations. Find out more here.
You should read my latest book, which is receiving great reviews on amazon.com. A recent review said, “Excellent book – highly insightful and informative — highly recommend it.” Learn more about the revised edition of “The New Rules of Retirement.”
Some Reading for You
Here’s an entertaining story with a lesson about how to be a good investor.
Fears about the future have wealthy retirees afraid to spend and sitting on cash, according to this survey.
This article explains why you shouldn’t rely on most investment research.
I comment and link to these and other items on my public blog.