Thursday, November 3, 2016

Will election results matter to markets? Not really

"Time and time again, political parties have tried to recruit the stock market to their side. Most of the time it backfires." -- Peter Eavis, writing for the New York Times, 2016.

As a retiree living mostly on investment income, I am at the mercy of capital markets and corporations that make a profit and pay me a quarterly dividend.

So how nervous should I be about what political party wins the national election and about who will be sitting in the White House in January? According to the experts at, I can relax.

“Over the long-term there has been no significant difference on average, between which party controls the White House,” they say.

Neither should I worry about a change in my federal tax obligation, say reporters at the Washington Post.
That said, many of my friends believe that if one or the other party wins the Presidency, we are doomed. The reality is that it will take a lot more than that to upend the economy.

Here’s the key statistic:
Since 1960, the overall average annual return from the American stock market is 12 percent. When Democrats were in office, the annual return was 12.2 percent. During Republican administrations the annual return was 11.8 percent

Yes, the Democrats want to tighten regulations on big banks and the health care industry including drug pricing. While tighter regulations can be a factor, bigger trends related to job creation and interest rates on loans may be more important.
“Ultimately, the performance of the economy probably will continue to have the greatest influence on the financial sector,” said Chris Lee, manager of Fidelity Select Financial Services.

 Lee agrees that a “growing global trend toward populism” suggests that regulatory pressure on banks will continue. There is some bi-partisan thought that the Glass-Steagall Act should be reinstated. The Depression-era law that separated commercial banking from securities activities was repealed in 1999.

My view is that banks are part of the bedrock of our economy. With tightened lending regulations, they should continue in their role as lenders. The real disruption in banking is the ongoing Information Age transformation related to online transactions and instant market manipulation. It is a miracle to me that I can deposit checks and pay bills using my smart phone. How many brick and mortar branch offices will banks need going forward? Or for that matter, how many employees will they need? I still like that 3 percent bank dividend.

As for health care, innovation is a huge factor in ongoing profitability for health care corporations and for drug companies. But you’ve got to be in it for the long-term.

Despite strong revenue growth, I have watched my Bristol-Meyer stock decline in value by 23 percent over the past year. That is because analysts are concerned about one of the company’s cancer drugs that failed to meet “its primary endpoint.” The people at S&P Capital IQ still rate the company as a buy. I am going to hold on for the 3 percent annual dividend and because an aging global population means more pills for more people.

As for other sectors, Fidelity analysts expect the energy industry profitability to strengthen in the coming year thanks to growing demand and cost reduction. Just stay away from extremely competitive alternative energy businesses.

Industrials and materials also should continue to strengthen. Typically in the late stages of a bull market (which we have enjoyed for seven years) consumer spending slows (which it is). Industrials on the other hand have a strong outlook because commodity prices should increase. 

Meanwhile, infrastructure spending (as promised by both political parties) is poised to increase as state budgets loosen up. Spending on roads and bridges should increase which is good news for companies like Caterpillar. Despite deadlock in Congress, we have a five-year highway bill and a two-year defense bill, which should give some stability to planning.

Meanwhile, the Washington Post compared tax policies of the two political parties. For the average retired couple with median income of $59,000, there would be no changes in taxation under the Clinton administration and an estimated $600 reduction in federal taxes with a Trump tax plan.

It would be nice to see the opposing political parties actually work together to get a few things done. More stalemate would undermine all the big picture problems that need attention.

I just need to keep reminding myself that over the long term, political parties are NOT an important factor in market ups and downs.

"How Politics Influences the Stock Market: Not Very Much, click here.

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