Our Board of Directors at Abacus has been communicating about the surprise election results, and what, if anything, to advise our clients to do in response. The short version is to stick to your investment plan, and if you foresee significant changes to your career (income or duration), retirement plan, or expected spending and charity, please ask us to update your financial plan and help you navigate a successful path to your goals.
How markets are reacting and what to expect.
Overnight markets were down significantly (generally 3-6%), but by the opening bell U.S. exchanges were trading flat. Markets don’t like surprise and uncertainty, which is at its highest point right now. Markets have adjusted to many “new normals” over the last 100 years. The nature of the uncertainty is almost irrelevant. However, the duration of it matters (i.e. recoveries from WWII and the Depression took much longer than 9/11 or Y2k), and investors are very bad at predicting duration. Today’s markets seem to be suggesting that uncertainty is much more contained than overnight markets feared. One reason may be the relative ineffectiveness of U.S. Presidents on the economy and markets, as shown in our latest Investment Committee Commentary. The anticipated effects of President-elect Trump are now priced into all public markets. There will be volatility going forward, but it will occur when new news breaks that isn’t already expected by the markets. It’s not enough to know that we may end up with more restrictive trade or in more global conflicts – in order to predict future market price movement, you have to know that those events aren’t already reflected in today’s security prices.
How effective have Presidents been at fulfilling campaign promises when their party controls Congress?
Even though George W. Bush had the privilege of working with a Republican controlled Senate and House for six of his eight years, his proposed tax cuts of 2001 and 2006 were curtailed after negotiations with Congressional Democrats, and he was unable to privatize Social Security, which he called “one of the greatest disappointments of my Presidency.”[1] Similarly, from 2009-2011, Barack Obama had Democratic majorities in both houses of Congress, and yet his effort to pass a bipartisan health care bill was tied up in the Senate Finance Committee for three months, and his desired economic stimulus bill was smaller than he’d promised.[2] These two legislative initiatives occupied so much of the first Obama administration’s attention that the campaign promises of closing Guantanamo, ending “Don’t ask, don’t tell” and meaningful or criminal consequences for the executives allegedly responsible for the Great Recession were all sidelined. As we consider President-elect Trump’s promises to unwind NAFTA and punish companies who have shipped U.S. jobs to other countries, both likely bad for markets, we might be heartened that similar promises haven’t been so simple for former Presidents to enact.
When and why to adjust your investment strategy.
Human beings make their worst decisions at times of emotional stress. The only decisions we should be making are the ones we set up in advance – to rebalance if our stock/bond ratios become more than 10% out of balance. There is no clear evidence that cash, Treasuries, or gold will be the “right” asset class for today’s version of uncertainty. If inflation or interest rates increase, cash and bonds will suffer. And even if we knew which asset class would be safest, we can’t know how long it will be right (i.e. when to re-establish our long-term investment approach). Your strategy should only be adjusted in response to changes in your expected income, spending, longevity, goals, or values.
The advances of the last few decades have made our society as a whole healthier than ever, more prosperous, highly innovative, and most of us are living longer and are safer than ever. Yet recent American prosperity has left many behind. In the event the Trump Administration does less to help the disenfranchised obtain education or affordable healthcare, or administers less fair treatment in the criminal justice system or does less to reverse climate change, the opportunity set for investors to profit from solving these huge social and environmental problems will be even bigger.
Let’s listen to each other, especially those who are least like us, and build bridges to make each others’ lives better. The Federal Reserve recently surveyed Americans and found that 47% would have to borrow or sell something to pay for a surprise $400 expense.[3] This election made it clear that there is a huge subset of the American population who feels hopeless about their economic prospects, and perhaps just flat-out scared. The Abacus mission is to expand what’s possible with money, and, in order to make sound financial advice available to those who most need it, we recently did away with investment minimums for anyone who retains us for ongoing financial planning. We also have a formal pro bono program. Our industry and our country clearly need to go much further to help make sure all can participate in the American dream. We look forward to talking about how we can partner with you in that effort.
Resources:
[1] http://millercenter.org/president/biography/gwbush-domestic-affairs
[2] https://www.brookings.edu/research/president-barack-obamas-first-two-years-policy-accomplishments-political-difficulties/
[3] http://www.theatlantic.com/magazine/archive/2016/05/my-secret-shame/476415/
