Pre-Election Jitters

I have received a number of emails recently from clients concerned (as expected) by the outcome of the election. Some are worried about what the markets will do if Mr. Trump is elected; others are ready to go to all cash if Mrs. Clinton is elected. Let's discuss what doesn't matter and what does. I will have a follow up email following the election.

First of all, I don't mean to sound flippant, but it really doesn't matter who is elected from a market perspective. Yes, the policies they enact are important. Yes, the tax policies are critical. Yes, the underlying growth rate of the economy is vital. Yet, there are more significant factors at work. The US stock market was overvalued in 1966 as the Dow Jones Industrial Average (DJIA) approached 1000. It did not exceed 1000 permanently until 1982. This is a 16 year sideways period that included Democrat Presidents Johnson and Carter, and Republican Presidents Nixon, Ford, and the beginning of the Reagan term. In my opinion, idiotic economic policies (remember price freezes?) in the late 60s and 70s combined with an overvalued stock market combined to give us this ugly period that included several recessions and bear markets, with the valuation being the biggest factor. And with 6-7% inflation, it was ugly. In fact, our financial planning software usually shows retiring in 1966 one of the most difficult 24-year timeframes in history.

The 18-year bull stock market run from 1982 until 2000 had Reagan and H.W. Bush on the Republican side and Clinton on the Democrat side. But the main factors were, in my opinion, in addition to more beneficial policies (Reagan cutting top marginal tax rates from 70% to 28% was key), the very low valuation of stocks in 1982. In other words, the overall valuation of the markets are more important than which party gets into office. This is not to minimize the importance of who is elected. Certainly, a more pro-growth, lower taxation, lower regulation President is likely to be more beneficial than the opposite. It is just that market valuation is more important, in my professional opinion.

So that begs the question on valuations-where are we?

US Stock market as measured by the S&P 500: by seven measures we track is the most expensive except 2000 and in some cases 1929. Ouch.

US Bond Market: practically at all time high valuations due to all time low yields. Double ouch.

Foreign Markets: more reasonable, especially emerging markets which appear undervalued.

Real Assets: depends. Natural resource equities, energy infrastructure equities, and commodities appear very reasonable having peaked in the summer of 2014 and dropped over 35-55% since then before bottoming earlier this year. Real estate investment trusts (REITs) appear more fairly valued.

So what does this mean for the typical investor? Vote well, but be tactically nimble in your portfolio. Remember that buy and hold works great in a bull market but can be devastating to your wealth in a secular bear market.

This is why we believe, while not perfect, a solidly diversified portfolio, combined with a rules-based risk management system such as WealthProtect is designed with the goal to produce more predictable results.

I'll send another email after the elections, especially focusing on year-end tax thoughts.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

Investing in Real Estate Investment Trusts (REITs) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

The Armstrong Wealth Management Group WealthProtect System is an investment risk control system designed (but not guaranteed) to limit significant losses in major bear markets (excess of 30% loss from market peak to market trough). It is NOT designed to prevent normal market losses (under 20%). No strategy can assure a profit or protect from a loss. Occasional false signals can reduce returns.