Knee-jerk Reaction No Way To Invest

Knee-jerk Reaction No Way To Invest

capitol-1024x768Recently, I returned from a trip from Washington D.C. Peter Forman, president and CEO of the South Shore Chamber, arranged a trip of local business owners and leaders to visit our congressional delegation to discuss the business climate and hurdles the business community is facing. While I had taken this voyage before, this year was particularly interesting primarily because of the presidential election cycle.

Over a few days, we met with congressional staffers, elected officials, organizational think tanks and trade groups. One of the best highlights was the U.S. Chamber of Commerce Capital Markets Summit. The theme of the Summit was ensuring the United States has competitive capital markets and easy access to capital markets. It was fascinating.

During our trip, we had several briefings and sparred with elected officials on small-business issues, import/export trade, banking, energy and infrastructure. While the term “spar” may indicate different points of view, we were in agreement on many issues, especially the promotion and importance of the Plymouth 400 celebration in 2020.

As I sat in on these meetings, I reflected at how complex and large our system of government has become. George Washington once said, “Government is not reason; it is not eloquence; it is force! Like fire, it is a dangerous servant and a fearful master.” Wow, was he prophetic!

The government is mostly in a holding pattern with each side blaming the other. According to one congressional staffer, there’s only 10-12 weeks left in the year to get things done via the legislative process and that was said in mid-March. We consistently heard, “Nothing will get done until after the election.”

Like a kid at Christmas, Washington, D.C., is eagerly waiting to see what Santa brings come election time. Washington staffers think they know what to expect with a Hillary or Bernie. However, Donald Trump, a true outsider, has the D.C. regulars on edge.

As a financial services professional, I was frequently asked what I thought the election would do to the markets. I’ve long since abandoned predicting the market. Politics may have an impact on the market. However, it is just one factor affecting the markets. Oil, corporate earnings, inflation, interest rates and many others factors impact the markets even more.

Emotional reactions to politics can lead to big investment mistakes. It’s easy to look back to the Great Recession of 2008 and assume the same thing may happen this election season because a new administration will be taking over. Behavioral economists call this assumption “availability bias.” Availability bias causes us to overestimate probabilities of events associated with memorable or dramatic events such as the market crash and elections in 2008.

History paints a different picture than what our assumptions may be. In 1928 election year, the Dow rose over 48 percent, a far cry from the 2008 “Great Recession” crash. Since 1928, there have been only three years where the S&P 500 Index had a negative return during an election year. Don’t panic just yet.

So which party will be better for the markets? Historically, markets tend to rally in years when Republicans take the White House and then suffer the following year. When Democrats win, the markets tend to languish and then rebound the following year. Regardless of party, administrations tend to make the hard decisions in their first two years, and then boost the economy and market sentiment in the latter years. The best year for the U.S. stock market has been by far the third year in the presidential cycle.

Following the 2008 financial crisis, many people swore off the stock market forever. People began to believe that the market was a casino stacked against them. Remember, markets and economies are cyclical. Unfortunately, some of the downturns are just more painful than others.

As we head toward this election, the TV “talking heads” will spew the so-called “facts” on the relationship between presidential election years and stock market performance. Always remember, lots of factors impact the market. Knee-jerk reactions to “sound bites” are not a prudent way to make investment decisions.

Should you be doing anything differently with your investments right now? If you have a definitive investment strategy, then the answer is DO NOTHING! Continue to invest in the same disciplined way that you always have. Investing involves understanding risk, diversifying, and thinking “long-term.” It works, no matter who wins the election. If you don’t have an investment strategy, GET ONE TODAY!

This article originally appeared in the Old Colony Memorial.

Helping widows rebuild their lives after the loss of a spouse. Love practicing yoga & golf. A connector. Strive to live by the Girl Scout Promise & Law.