Ah, election season. I do not think Hollywood could script a more fitting ending to 2020. As we have met with clients over the past couple of weeks, politics and the elections have been on the forefront of most minds. If we already had a chance to sit down and talk through your concerns then let this serve as a refresher to our thoughts. If we have not, allow us to provide some insight on how we view politics and this election in particular, in context of how we view the financial markets and our investment portfolios.
First, we go into this process understanding that everyone has and is entitled to their own opinions regarding politics. We have ours here in the office and we are aware that all of our clients do as well. Beliefs and opinions, though, do not weigh on our professional responsibilities to our clients. We view ourselves as political “agnostics;” we manage with a focus on policy, not party. We have one responsibility and that is to assist in growing your wealth, and more importantly, helping to ensure that your future goals and objectives can be met.
As I was going through my undergraduate studies in economics, I developed the following thought:
Policy makes markets,
Politics break markets, and
Politicians have no “say”.
While I envisioned this in regards to markets pertaining to global economics, I think it holds true for capital (investment) markets as well. Several of you jotted this down in our meetings, but I want to expand on it a bit.
Policy Makes Markets
This is the crux of our political “agnostic” assertion. We believe that policy has the single largest impact on markets in general. It gives us an idea where markets may be heading and allows us something objective to build upon rather than the more subjective nature of politics. We manage investments with the belief that both parties in the United States put forward good policy as well as bad. Policy provides the groundwork for the formation of new markets and for old markets to close or diminish. Either way, it allows us to navigate appropriately.
Politics Break Markets
Anyone who has ever taken an introductory level finance or economics course was probably taught that successful markets share three core tenets: they are efficient, rational, and un-biased. We do not need to go into deep detail to explain how politics can break down markets. By nature, politics are the antithesis to what makes a market successful. Politics cause inefficiencies. That they are extremely biased and irrational is probably an understatement. Which leads to the last point…
Politicians Have No “Say”
There is a caveat to this statement, hence the reason that “say” is in quotes. Politicians are typically the very people who are responsible for implementing policy, right? We would counter that “lawmakers” set policy and “politicians” play politics. For the difference between the two, see above. What is meant by politicians have no “say” is that no one person or group can will the markets into good standing. They truly have no “say.”
The election cycle has played out much as we anticipated over the last several months. It is important to remember that the financial markets are a forward-looking pricing mechanism and they began pricing in a very close and contested election almost as soon as President-Elect Joe Biden won his party’s primary nomination. While we had volatility leading up to the election, that had more to do with several installments of failed stimulus negotiations and spiking COVID cases worldwide. As Election Day came and went and it appeared that the scenario of single-party control in Washington was not materializing coupled with positive vaccine data, we saw the markets reverse course and trend higher. While we are still in a period of high volatility, we just happen to be volatile to the plus side rather than the negative right now.
Looking forward, as we continue to receive more clarity, the volatility will diminish but we are not anticipating it to subside. The pandemic will still be item number one on both party’s agendas after inauguration day and will continue to cause increased volatility until we see cases begin to diminish again. The continued focus on the pandemic and the economic recovery will allow us time to get a better idea of what the administration’s policies will look like. As stated above, policy is how we shape the course of our investment portfolios. If a change in policy points us to markets we are not currently in, we will adjust appropriately.
We will provide a longer view outlook for next year and beyond when we send our annual end of year letter next month. For now, please let us know if you have any questions, comments or concerns. We will continue to provide context to the evolving situations playing out this year.
We ask that you please share our newsletters with your family members, friends, and neighbors. More importantly, if you know of anyone who may be questioning whether they’re invested in the most efficient manner possible during this volatile period we encourage you to put them in touch with us for a “second opinion” on their investments. A referral from you is the best way to show us that these communications are providing you with valuable insight to your investment success.
We hope that you and your family have a safe start to your holiday season.
Ryan Flanders, CFA
Investment Advisor/ Portfolio Analyst