As the insanity surrounding the current presidential election reaches a crescendo, Americans are eagerly looking forward to next Wednesday – if only so the lying, insulting, backstabbing and muckraking will be out of the headlines. We have no doubt that these things will continue, but at least we believe that both parties will be spending less on advertising to share their version of the truth with all of us. The vitriolic nature of this year’s election is often blamed for having an impact on things as varied as NFL Viewership, declines in restaurant visits and, more importantly, casting a pall of uncertainty over the investment markets. We are all looking forward to this coming to its conclusion next week.
As distasteful as the process has become, we all should remember the importance of our responsibility to vote. The decision this year may be difficult, but I urge each and every one of you to study the issues and make the selection that best aligns with your values. This decision and its impact on your future is too important to leave up to someone else.
Obviously, the topic of the elections and its possible outcomes has been at top of mind for many of you. Here at Cascade we have spent quite a bit of time using history as somewhat of guide to what to expect from the markets. First, we looked at market performance over the last 28 presidential terms. The result? As the charts below show, there is very little discernable difference in market performance over time under either of the parties:
Further, this next graphic outlines market performance during the shifts in presidential popularity:
In the timeframe represented by our current president and his immediate predecessor, the graphic indicates that the market can perform extremely well while the president’s popularity strikes record lows. Additional research from our colleagues at AthenaInvest shows a similar trend: The political party that enters the White House is no predictor on the performance of the stock market or the heath of the economy. When it comes to investing, the outcome of elections should have little impact on the long-term success of your investment strategy. Well-positioned, well-led companies will create investment value regardless of who sits in the White House.
The short term, however, is a different story. The current “analysis” (Analysis actually means “best guess”) within the investment industry is that a Clinton win will have little impact on the market immediately, as she is perceived to have a “more of the same” stance following the Obama administration. However, a Trump win is expected to bring increased volatility, as uncertainty about his policies and priorities increase. Markets never like uncertainty… thus a win by Trump is expected to bring more short term volatility than a win by Clinton.
If you are certain who will win and accept the “analysis” above as fact, perhaps then you can make the appropriate trades and benefit from a short-term result. However, our combined decades of experience in the investment business have taught us that getting calls like this right is virtually impossible and making dramatic shifts in your investment strategy based on short-term predictions is rarely a productive exercise. Those of you who have attended our recent “Well-Advised Lunch” sessions (which are held monthly in our Dallas and Denver offices and available via webcast) have seen me talk repeatedly about the chart below:
This colorful chart shows, by column, how various asset classes have performed each year for the last 15 years. A couple of things typically jump out at people right away: First, it’s obvious that it is very difficult to predict what asset class is going to perform best based on how it did the year before. Second, the white boxes with the connected dots tend to perform predictably and consistently over time. These white boxes represent a diversified portfolio of all the asset classes, much like you would find in any well-constructed investment plan. Perhaps most importantly, this chart includes 3 presidential election cycles – and some tumultuous ones at that!
It’s important to remember that volatility is the characteristic of changing often and unpredictably, but this does not necessarily equal risk. Think of a roller-coaster at an amusement park. An old, rickety kiddie coaster with few drops and curves is much less volatile than a modern, steel coaster with loops and vertical drops. However, the volatility in the modern coaster poses a much smaller risk to the rider than the lack of structural integrity found in the simple, but rickety alternative. In the same way, volatility is inherent in stock market, but the structural integrity of your investment plan is a far more important indicator of risk. It is our continuing belief that the best way to position your investment portfolio for the potential volatility of this election is to stick with your plan… or get yourself one right away!
There are other, non-market impacts of significant importance to evaluate when making your voting decision. Keep in mind that the President will influence attitudes toward public policy, particularly towards healthcare, overall entitlement spending, and tax policy. Perhaps fortunately, congressional gridlock should continue making it difficult for the President to implement significant changes in the near term. Also of note, the next President will likely have the responsibility of naming several Supreme Court justices, which can have a lasting impact on our judicial system for decades to come.
Further, the party in power will have influence over the nation’s regulatory stance, which can often have far reaching implications on a variety of industries.
On the subject of regulation, our own industry has been the subject of significant regulatory changes that will impact effectively every investor in the country. In April of 2016, the Department of Labor (DOL) announced its final rule expanding the “investment advice fiduciary” definition under the Employee Retirement Income Security Act. As part of this rule, the DOL expanded its area of oversight to include IRA accounts, whereas their previous purview was essentially limited to qualified employer retirement plans, such as 401(k) plans. The intent of this rule was simple:
• To eliminate conflicts of interest between investment advisors and their clients
• To ensure that all forms of fees and compensation to the advisor are transparent as well as conflict-free
• To ensure that those fees and forms of compensation are reasonable
We at Cascade applaud and whole-heartedly support the objectives of this rule making and truly believe that it is intended to bring real value and protection to investors. We are a bit concerned, however, that these objectives take 1,027 pages of rule-making to communicate. As with many regulations, we are also concerned with the potential for unintended consequences that a rule this complicated may bring, particularly for individual investors. That said, Cascade, though our industry associations and other efforts, has been intimately involved in the rule-making process since its inception in 2010, and the final rule and its timing came as no surprise to us. In fact, we have worked diligently for the past several years to prepare for the rule and to position our firm at the leading edge of the industry in the movement toward the expended fiduciary role we will now be playing. For many of our clients, our relationship will not change in any way. As we continue to study the rule and work with our outside experts to interpret all the idiosyncrasies within those 1000+ pages, we clearly see an opportunity to separate ourselves from other advice providers by offering an expanded set of services to our clients and more clearly defining the value that a relationship with Cascade brings to the clients and families we serve.
Market Performance by Party: The New York Times. As of 10/26/12. DJIA is an acronym for the Dow Jones Industrial Average. Past performance does not guarantee future results. http://www.nytimes.com/interactive/2012/10/26/business/Presidential-Stock-Markets.html?_r=0
Market Performance vs Presidential Popularity: Gallup, 2/28/15. The Presidential Approval Ratings were introduced to gauge public support for the President of the United States during the term.
Market Performance by Asset Class: Source: JP Morgan Guide to the Markets – U.S. Data are as of June 30, 2016