by Kevin Kern
When I first met our senior economic advisor Alan Greenspan, I asked the former Federal Reserve Chairman three questions.
- Of the five presidents you worked under, who was the smartest?
- Which president was the most likable?
- And can a president change the path of the economy?
The latter question has been coming up recently with clients as we near the election. Can an election, a president or a change in the House and Senate cripple or help the economy and the stock market?
Dr. Greenspan’s answer to me, and I am paraphrasing was, “President’s don’t change economies, they inherit economies”. Looking back over the years, this seems to hold true. Administrations can certainly goose or stun an economy, but Presidents usually get what was handed to them based on larger and longer macro-economic issues. Market returns are made over a full business cycle, which is longer than even one presidential term.
As we near the election and political rhetoric ratchets up, investor fear has heightened. Emotions tend to have influence over rational thinking, which can lead to investment mistakes. Logical questions today such as, “What is the ACM investment committee doing to hedge my portfolio from a potential change in Washington?” can become more irrational in November with, “If the President is not re-elected, all hope for the U.S. economy may disappear, so is it time to buy gold?”
Whatever your political party, concern or hope is on November 2rd, we will all be here with the inherited economy on November 3rd. The pandemic will be here as well. By November, there will have been nearly $9 trillion in stimulus thrown at this problem with interest rates at the lows of our lifetimes. I ask you logically, what do you think might happen should there be a new Administration? Fiscal and monetary policy will most likely remain focused on the crisis at hand. And the current or future President’s primary goal will be to restore jobs for 10 million Americans or face a shellacking in state and mid-term elections.
With so much stimulus bubbling to offset the economic effects of the pandemic, and no place for income investors to go for yield, my money is on equities for the foreseeable future. The primary concern is not a Washington regime change, but the virus. Both the existing or future Administration will be laser focused on ending the current crisis. When successful, the trillions of stimuli and the effects of 0% borrowing for corporations and consumers should rise to the top.
Can we protect or hedge portfolios for potential changes in tax policy, industry favoritism or enmity and broader economic changes? Certainly. We can and have reduced exposure to areas that might see a negative impact from some likely Democratic policy initiatives. We are similarly adapting to take advantage of a potentially weaker dollar. But these changes are limited in the sense that we would never skew a portfolio heavily in one direction or another based on an election or a thesis. Politicians often don’t deliver on whatever they have promised. The economy managed to perform quite well over many years with higher tax rates, for example. Democrat or Republican, the world will not come to an end on November 3. Politicians adapt. People and markets most certainly evolve. Do I need to remind you where the Dow futures were November 2nd 2016 and where they opened the next morning?
A diversified portfolio will benefit from broad economic changes rather than a handful of sectors or particular legislation. Investors with concentrated stock positions should be more nervous, as singular issues or laws can affect them disproportionately.
The famous line from Clinton campaign strategist James Carville was, “It’s the economy stupid”. Sound familiar? Clinton arguably won that election due to the negative turn in the economy preceding November 1992. This year, at least for investors, “It’s the pandemic, stupid”. Our road to economic prosperity will be gauged by how we handle this virus, as Dr. Greenspan wrote in his most recent ACM commentary. The pandemic has made some tech companies and investors richer but the control of this virus will ultimately allow our economy and the stock market to enjoy the trillion-dollar winds blowing from Washington in our sails for future growth.
In keeping in confidence with the former Federal Reserve chairman, I shouldn’t tell you who he thought was the smartest or best Presidents to work with… at least in print. But I will tell you that personality or smarts of the Presidents did not affect my portfolio over that last 35 years.
With Presidential elections, like all other newsworthy events, you need to make sure to have a diversified portfolio in place, and then stay invested. But the real key is sticking to your longer-term strategy that’s designed for more than one election cycle.