During the 3rd quarter of 2016, the S&P 500 began to experience more volatility but did move slightly higher for the quarter. Though we are higher on a quarter over quarter basis, we remain within a few percentage points of where the S&P traded during Q4 2014. I share the frustration of my clients when looking back over the past 22 months, having seen a lot of churning in the markets but no significant movement forward.
I have spent the last 3-4 months evaluating the impact of the upcoming election and the decisions we will need to make once we know who the president will be for the next 4 years. Since attempting to tell the future is a fool’s game, I typically try to avoid outright predictions. I do, however, feel compelled to explain to you my expectations and decisions to be made over the coming quarter.
While it is not unusual for the market to move sideways during times of uncertainty (this election cycle fits the definition of uncertain), it is unusual that the candidates are so diametrically opposed in the manner they would lead the country, and in what way and which industries they would impact. As investors try to reposition ahead of the election, I believe significant volatility may be created, mostly in a downward direction because when investors are uncertain, money tends to move to the sidelines. I believe a significant decline in the market during the month of October would result in a win for the Trump Campaign. Conversely, a flat to up market seems to favor a Clinton victory. Regardless of the winner, significant changes are going to occur in the industries our clients have heavy exposure to. Financial Services, Healthcare, Health Insurance will be the most significantly impacted, with Aerospace and Defense impacted to a lesser extent.
A reallocation of most HFG portfolios will need to occur post-election. Data provided by Deutsche Bank Investment Analytics, reports significant data on election cycles going back to 1960. Interestingly, in the years when elections occurred during a recession (1960, 1980) the market was up post-election through the end of the year on an average of 7.5% (this excludes 2008, which is considered a statistical outlier; in 2008 fourth quarter the market was down 14.7%). In years where the power shifts from one party to another (1980, 1994, 1996 – both Senate and House swung Republican), the market was up an average of 4.5% post-election. In fact, over the 14 presidential cycles since 1960, only 4 reported negative returns during the period of time from the election until the end of the year, the worst being -4.4% in year 2000. Since 1960 the average rate of return during presidential election cycles from election to the end of the year has been 4.3%.
The reason I have included so much data in this commentary is to show I believe we have a window of time, post-election, to evaluate what changes need to be made and time to execute those changes prior to the start of 2017. Whoever the winner is, we have enough data on both individuals to know what angle they will attempt to take when dealing with the economy and the current financial system.
With a 4 to 6-week window to reallocate portfolios, I am recommending a “wait and see” approach to clients. With this approach, we can avoid any emotional decision making in the period leading up to such a significant election, and we will be prepared to reallocate post-election when we have a clear picture of the leadership for the next 4 years. Significant reallocations will occur during mid-November through the end of the year as we try to reposition for the future.
Thank you for your business and I appreciate the opportunity to work for you.
Michael R. Harding, CFP
President / Portfolio Manager