2016-election-forcast

Will the Election Affect the Stock Market

 

I have received numerous calls all asking “What’s going to happen with the election? How will it affect my portfolio?” My answer – “Honestly, I have no clue.”

All markets contract and expand and historically over the past 100 years, the stock market has performed better under Democratic Presidency. Take a look at the Dow Jones Industrial Average and you will notice it generates an average return of 82.7% under a Democratic president, compared to a 44.8% average return with a Republican President. Further, during election years, the Dow Jones Industrial average has typically fallen during the last year of the second term of the President of the United States.*

History alone cannot predict what will happen within the stock market. In my opinion, there is quite a bit more in play.

 

Critical Economic Factors In Play

GDP (Gross Domestic Product) – The GDP has been less than 3% over the past ten years. This is a lagging indicator clearly showing that the United States is in a period of slow growth.

Why such a lack of growth? For the US to grow, people must be spending money within our country. This means we need good jobs and higher wages that promote spendable income because spendable income is a natural stimulus for economic growth.

Unemployment – This means real employment numbers. Are reported unemployment numbers and job growth real? Are the calculations flawed? My opinion is they are. For example, once unemployment benefits expire, the unemployed may be removed from the number making it appear that there are less unemployed. In reality, there are less receiving benefits but that does not mean they are employed.

Taxes – Taxation definitely enters the equation too. If corporations are taxed heavily – resulting in lesser profitability – it may be difficult for them to expand and add more jobs domestically. There has been serious consideration about increasing taxation of the wealthy. But is that really the answer? My opinion is no.

Less taxation on corporate and individual levels acts as a natural stimulus to the economy. It allows businesses to expand, promotes more jobs and fosters higher wages. Increased employment with more pay promotes spending within our economy and should naturally fix America’s growth problem. Why? Lower taxes = domestic corporate growth + job growth + increased wages = investment in the US.

In my opinion, higher taxation has the opposite effect. Why? Higher taxes = domestic corporate contraction + unemployment + decreased wages = limited to no investment in the US. This is why corporations move operations overseas. They are forced to stay competitive due to high taxation. How do they stay competitive? Jobs are moved overseas for cheaper wages. We have less jobs, lower wages, promoting little investment in the economy. Subsequently, there is no natural or organic stimulus resulting in little to no growth.

U.S. Federal Deficit – The National Deficit is approaching 20 trillion dollars. What does this mean to me? The United States is bankrupt and has been for some time. Why? We are spending more than we are receiving. This is why the argument for higher taxes as the solution to the problem. The IRS is our collection agency and largest source of revenue.

But could lower taxes kill two birds with one stone (U.S. growth and employment)? My opinion is yes but not overnight. The quick fix – much of what has been going on with the Federal Reserve, through quantitative easing and 0% interest. In essence, it seems as if the Federal Reserve has put a bandaid on a festering wound. This does not promote healthy long-term U.S. growth in my mind.

The Federal Reserve Talk about an inconsistent teeter totter. I don’t predict any changes in interest rates until after the election, although predictions seem to be meaningless with the Federal Reserve.

Federal Reserve interest rate hikes are meant to slow the economy down. Why would that be the goal prior to the election?

However, for the first time since the financial crisis, there is a high direct correlation to bond and stock market movements.** This is unusual as they typically have an inverse relationship where shorter term bond investments are used to reduce risk. This means trouble for managers, utilizing modern portfolio theory, allocating bonds as the best line of defense in efforts of risk reduction. Instead of bonds the push is trending towards cash.

 

The End Conclusion

I can’t predict what will happen. The only thing I know for sure is that all markets expand and contract.  My opinion is interest rates will have to rise. This could have a double contraction with the bond and stock market. However, a well-disciplined investment philosophy developed pursuant to your needs with a disciplined global approach may be your best line of defense.

I am here to help you and welcome a discussion. If you feel a second opinion would be beneficial or you would like to test your portfolio for gaps I would be honored to assist you with no cost or obligation

* Source – Nasdaq.com, Trevir Nath, March 1, 2016

** Source – Routers, September 26, 2016

This is not intended to give specific legal, tax or investment advice. Securities offered through Nepsis Capital Management, Inc.; and SEC Registered Investment Advisor
Related Article “How Does the Economy Affect Investment Planning?

Rick Torrington

Rick Torrington, CFP® has been offering sound comprehensive financial, retirement, asset protection and wealth management advice to his clients in Sarasota and most of Florida for close to 20 years. He is diligent in his efforts to provide clarity and financial knowledge to the public through his articles and ebooks.