We are headed into an election year and undoubtedly the race for the White House will have many twists and turns. For markets, that can lead to volatility since there is a complex interaction between government policy, economic growth and corporate earnings. Below we take a look at investors’ views on the importance of the presidential election and what is currently priced into the markets.
Recent surveys of investor expectations indicate that the presidential election will significantly impact the economic outlook over the next 12 months.
According to recent surveys, investors cited risks associated with business sentiment and investment as well as the potential for regulatory change as key headwinds for economic growth. Most respondents expect the presidential race to have a significant impact on the outlook for the next 12 months. What that impact will be is dependent on the different agendas and policies put forward by each candidate.
Source: Evercore ISI
Despite investors’ expectation that the election outcome will materially impact policy, the markets are not pricing in this uncertainty.
For example, the highest share of survey respondents in Morgan Stanley’s study expect the Financial, Energy, and Technology sectors to have divergent outcomes depending upon a Republican or Democratic presidency.
But the market is pricing in a low probability of these sectors making new market lows.
Given current market pricing, we do expect election driven market volatility as investors follow the polls and anticipate policy changes and their potential impact on specific market sectors and economic growth.
In our view, when it comes to the real economy, politicians overstate their ability to autonomously transform economic growth. Beyond the presidential race we will be watching the outlook for control of the House and Senate. Divided governments tend toward legislative gridlock while the likelihood of passing transformational policy increases in a unified government.
The presidential race obviously has some implications for economic policymaking, but unified control of the White House and Congress could have a more material impact on economic growth prospects.
Your team at APCM will be looking through election volatility to assess how policy will affect growth in the short term (through demand) and longer term (through the impact on the economy’s supply potential). Stay tuned!
SO, what should investors do?
Whatever the cause of heightened volatility, it’s thoughtful decisions—not impulsive actions—that separate the top-performing investors from everyone else.
Fear is an important instinct that many animals (including humans) possess in order to stay alive. This instinct is very valuable but can be problematic when it comes to investing as it often leads us to impulsive decisions. However, if we are making impulsive decisions, we are no longer investing, we are speculating. As investors, we need to stay focused on the goals of our investments and the time horizon in which they need to be achieved.
Preparation is key! It will lead to more thoughtful investment decisions and increase the probability of meeting your specified financial goals. Evaluate risk throughout your investment horizon and stress test your portfolio so you understand what the ride might feel like. When you eventually experience these stressful conditions does it impair your ability to meet your stated goals? How much defense can you play? There is a fine balance between reducing portfolio risk during stressful market conditions while maintaining the appropriate risk/return characteristics that align with your financial goals.
APCM designed a sound investment process that helps our clients answer all necessary investment questions, including those above, so we all can make thoughtful decisions when it counts the most.
Brandy Niclai, CFA®
Chief Investment Officer