The Election and Your Portfolio

Last update on: Oct 24 2019

The election everyone said they hated is behind us. Now we plan for the results.

Post-election forecasts are as precarious as pre-election forecasts. I remember after Bill Clinton was elected in 1992, the consensus was that stocks of “green companies” would do well and defense stocks would do poorly.

There even were newsletters and mutual funds created to profit from this opportunity in the wake of Clinton’s election. Things didn’t turn out that way, and people who bet on “green companies” to flourish lost a lot of money.

Remember, just a week ago the consensus was that a Clinton victory would be positive for stocks and a Trump victory would be a disaster for stocks. It hasn’t worked that way so far.

There are three time frames you need to consider when deciding how, and if, your portfolio should be changed because of this election.

The first time frame is the immediate future. The answer is that you shouldn’t change your portfolio at all, at least not because of the election. We saw a lot of investors make this mistake after the Brexit vote in the United Kingdom on June 23.

Initially, they thought the vote changed everything. Then, after studying the facts, they realized nothing would change for at least two years.

After Ronald Reagan won the presidency in the 1980 election, it took about 18 months for his policies to affect the economy, according to Trump’s economic advisor Steve Moore. Nothing can change until the new president is inaugurated. Even then, it will take some time for the president and Congress to enact any changes. The economic and investment trends aren’t likely to be affected by the election for months.

With Republicans controlling both houses of Congress and the presidency, they’re likely to push through measures such as reduced regulations, tax-reform and infrastructure spending. These should be pro-growth. When the policies kick in, we’re likely to see somewhat higher economic growth but also higher interest rates and inflation. This should be bad for interest-rate-sensitive investments but good for commodities. The dollar also should do well. It is unclear what will happen with trade policy.

The policies generally should be positive for stocks, but the benefits won’t be evenly spread. We’ve talked about headwinds facing stocks such as lower profit margins, higher interest rates, a weak global economy and rising wages and commodity prices. Most of these headwinds will continue. Some stocks will benefit more from the new policies than others will. I think it’s a good idea to invest with focused mutual funds that concentrate on relatively few stocks rather than an index fund or a less-concentrated actively managed fund.

We need to follow developments in the new administration to determine if adjustments are needed in this outlook. I’ll be paying attention to cabinet nominations, relations with Congress and statements by both the new president and Congressional leaders in addition to actual legislation and regulations. A wild card is that Republicans don’t have a veto-proof majority in the Senate. To what extent will the Democratic minority in the Senate use procedures to prevent action?

Our Retirement Watch portfolios already are well-positioned for the expected immediate environment, and we’ll probably tweak them as policy details become clear.

We also have to consider the longer-term implications of the election.

Angry voters propelled Donald Trump to victory and also helped Bernie Sanders do well in the Democratic nomination contest. Some commentators misunderstand the reasons for voter anger and thus didn’t interpret the situation well. People are angry because they have lost economic ground in recent years and don’t see a brighter future for themselves or their children. They don’t know exactly what went wrong, so they lash out against the establishment, the political system, immigration, trade agreements and other targets.

If the new government enacts pro-growth policies that work, most of the anger will subside. But if growth doesn’t increase (or takes too long to increase), the anger will remain and increase. Then, we’re likely to see strong movements in favor of trade wars, severe immigration restrictions and other policies that don’t help growth.

Of course, there’s a lot of uncertainty. It’s almost always a good idea not to bet entirely on one outcome. A balanced, diversified portfolio is best. One example is our True Diversification portfolio. The more uncertain you are, the more diversified your portfolio should be.

The Data

Household spending continues to be the leading support for the economy. The latest Consumer Credit report showed a second month with a strong increase in credit card spending. Consumers have been hesitant to spend with credit cards throughout the recovery. These reports indicate consumers are becoming more confident about their economic situations. That also is reflected in the positive retail sales and consumer sentiment reports.

The Small Business Optimism Index from NFIB increased slightly to 94.9. The index slid to a two-year low in April following the market turmoil from early in the year. In the latest report, half the index components were positive. The negative aspects of the report were that business owners are a little less optimistic about rising sales in the coming months.

Last week’s Employment Situation reports were in line with recent trends and expectations. They show the labor market continues to tighten. It is clear that many of those who left the labor force aren’t going to return. There are many part-time workers still looking for full-time jobs. Employers are finding that they need to increase wages faster than earlier in the recovery. In the latest report, average hourly earnings increased 0.4% for the month while the average workweek remained unchanged. The 12-month wage increase is 2.8% and is the peak for the recovery. That should increase economic growth but also hurt business profit margins.

The Job Openings and Labor Turnover Survey (JOLTS) confirms these trends. New job openings are high, but still below their recovery highs reached early in 2016 and below some months in 2015. Though job openings increased, hiring decreased and so did layoffs. That indicates employers are having trouble finding workers they want to hire and are trying to retain existing workers.

New unemployment claims declined by 11,000. That’s further evidence that employers are holding on to workers.

The Markets

The election made this a volatile week. In the end, the major stock indexes ended the streak of nine consecutive losing days, the most since 1980.

The S&P 500 gained 3.17% for the week ended with Wednesday’s close. The Dow Jones Industrial Average rose 3.69%. The Russell 2000 soared 6.04%. The All-Country World Index rose 1.24%. Emerging market equities lost 0.38%.

Long-term treasury bonds lost 5.33%. Investment-grade bonds declined 1,66%. Treasury Inflation-Protected Securities (TIPS) lost 0.99% and high-yield bonds gained 0.54%.

The dollar gained 1.19%.

Energy-based commodities lost 0.35%, while broader-based commodities gained 0.39%. Gold lost 1.60%.

Bob’s News & Updates

Do you need gift ideas this year? Consider joining those who gave family and friends copies of the second edition of my book, “The New Rules of Retirement.” It’s the ideal, most up-to-date guide to any stage of retirement planning, even for those who’ve been retired for years. To receive signed copies at $25 per copy, send a check to Retirement Watch, LLC, P.O. Box 222070, Chantilly, VA 20153. We pay the shipping. Include your return address and instructions about how I should dedicate any books that you want me to sign.

Some Reading for You

Alan Greenspan gave an exclusive interview to Bloomberg Television in which he was decidedly bearish about bonds.

On Election Day eve, China quietly announced several important changes, apparently hoping few would notice.

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

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