Here we go again! Four years have passed by and we are faced with another presidential election that is creating concerns of volatility in the stock market. While making rash investment decisions based on potential election outcomes might be tempting, I would encourage you to keep three main points on the forefront when speaking with your clients: maintaining a long-term perspective, understanding both potential tailwinds and headwinds, and learning to prepare for volatility.
When I started in the investment business in April 1986, the S&P 500 was at 238. As of October 16, 2020, the index is at 3,483. Said differently, if I would have invested $100,000 in the S&P 500 and ignored potential fluctuations from presidential elections over the past 34 years, the original investment would be worth $3,065,031 as of September 30, 2020. Over this period, we have experienced eight presidential elections, with both Republicans and Democrats winning the Oval Office. Unfortunately, my guess is that more money was lost than gained trying to predict the depth and duration of short-term volatility during these election periods. This is not to suggest that the president or political party is irrelevant, rather that businesses learn how to adjust to different policies and the overall economy will ultimately excel over long periods of time. Helping clients understand the benefit of a long-term perspective is critical to effectively navigating volatile periods of time.
Understanding tailwinds and headwinds
While we tend to hear a lot more about potential headwinds such as a contested election, the COVID-19 pandemic and higher taxes, it is important to remember that there are also numerous tailwinds that are likely over the next 12 months. A low interest rate environment, a potential vaccine, infrastructure spending, a COVID-19 relief bill and over $18 trillion in M2 money supply are all tailwinds to the equity markets. The megatrends in technology and innovation sweeping the world only add to this. From a presidential perspective, a Trump presidency is likely to be a tailwind for the equity markets over the next several years, while a Biden presidency would likely be a headwind. This is primarily the result of the potential for higher taxes and greater regulation under a Biden presidency. With that said, it is important to remember that not everyone votes with the economy or stock market as their primary concern.
Make sure that both the headwinds and tailwinds are discussed! Communicating both sides to your clients will also help with the long-term perspective discussed above. For more information on the growth currently occurring around the world, you may also enjoy the book Ten Global Trends Every Smart Person Should Know by Ronald Bailey and Marian L. Tupy.
Prepare for volatility
When I started in the business, I thought I was able to predict volatility. Now, I know enough to know that I don’t know what the market will do in the short run! It has been far more beneficial to learn to understand that short-term fluctuation is the price investors pay for long-term success. Some of the investment pundits are predicting a 5% to 10% market decline if Biden wins the presidency. While this may get headlines, it should be noted that 5% corrections occur about three times per year, and 10% declines occur about once per year. As investment professionals, most of us would agree that these types of declines certainly aren’t as newsworthy as the media often makes them. Investors would be better served if the pundits would remind investors that every time in history the market “corrected” it went on to set new highs.
In conclusion, let’s remember that great companies and markets are more powerful than politicians. Being a great financial advisor means helping clients achieve their long-term goals and objectives, not making short-term market predictions. Although it may feel as if we know the potential near-term issues for investors, there will ultimately be events that occur in the future that we weren’t expecting. The past 12 months have been evidence of that fact. Remember, you rarely get hit by the bus that you are watching! If we can help our clients maintain a long-term perspective, remind them that headwinds come with tailwinds, and help them prepare for volatility, we will keep our clients on the path to maximizing their lives and legacies.
Greg Weimer is wealth manager and partner at Confluence Financial Partners.