Politics and investing are incompatible bedfellows

Don’t lose sleep worrying about a tenuous relationship

August 25, 2017

Politics and investing don’t mix. The global economy is deeper and more complex than most elected officials can ever hope to influence. Stock market movements are influenced by factors other than election results.

Don’t try to outguess shifting sands

What affects the markets is the collective – but not always consistent – behavior of millions of individual and institutional investors based on competing needs, prejudices, judgments and, in recent years, programmed computer algorithms. You cannot outguess or outsmart shifting sands.

A blog post (May 25, 2017) written by Nik Schuurmans, carried the following extended comment:

‘Fortunately for us, 2017 provides several examples of investors potentially leaning the wrong way due to perceived political risk. Cabinet turnover, allegations of disclosing classified information, Syria airstrike, healthcare reform challenges, impeachment talk, Russia probe, etc.  What else could we pile on?  Despite all of the above, U.S. equity markets have been resilient appreciating ~14% since the [presidential] election.’

Despite turmoil and dislocation European markets thrive

Schuurmans went on to point out that despite the turmoil of Brexit, the dislocation of the Greek bailout, elections and referendums of one kind and another taking place on the other side of the Atlantic, the emergence of potentially destabilizing populist political candidates in the Netherlands and France, ‘Europe has been one of the best performing developed markets in the world…go figure.’

He has a point. Since 1929, there have been 18 stock market crashes and we’re all still here. As Barry Ritholtz, equities analyst, CIO of Ritholtz Wealth Management, and Bloomberg View columnist pointed out in The Washington Post (November 11, 2016):

‘When we look at genuine shocks – such as the attack on Pearl Harbor, the assassination of John F. Kennedy, September 11, 2001, Standard & Poor’s downgrading of American debt rating in 2011 – there is a pattern that plays out over and over. Markets wobble as traders react emotionally. Often there is a panicked sell-off that goes too far. Eventually cooler heads prevail, and the market returns to whatever it was doing before the surprise event.’

Ride the rally and dodge the downside?

Yes, it’s preferable to ride the rally and dodge the downside, but sometimes that’s just not possible. Right now, economists are making a living running models to try and predict what will happen if U.S. taxes are cut and NAFTA is subject to radical re-negotiation. You can line up as many economists who believe tax cuts will stimulate the economy and create jobs as you can doomsayers who will argue just the opposite. The point is no one can predict how economic life will play out in the future.

Stop worrying about things you cannot control

Instead of worrying about things you cannot control, the best approach is to develop an investment plan based on your long-term goals. Your financial future will depend on how much you save and invest, how you control your spending, and how you structure your portfolio based on the risk you’re willing and able to take given your desired return.

This is a long-term approach, and discipline and patience are required for any long-term plan to work. Stick to the fundamentals. And, as the motivational poster produced by the British government in 1939 in preparation for World War II proclaimed: ‘Keep calm and carry on.’

Geoff Funke, Senior Wealth Advisor, Scotia Wealth Management, 604.535.4721