Is Your Portfolio Election-Ready? - Adviser Investments

Is Your Portfolio Election-Ready?

October 14, 2020

Episode Description
FEATURING Director of Research Jeff DeMaso and Vice President Steve Johnson

How will the outcome of the 2020 election affect financial markets? Should you adjust your investment strategy based on the election results? In our last podcast before election day, Director of Research Jeff DeMaso and Vice President Steve Johnson talk through the possible post-election scenarios and take a research-based approach to get to the truth about this timely topic. They discuss:

  • Does the winner of the White House really matter when it comes to long-term investment success?
  • How to bypass an emotional response to political news in order to focus on what matters in the market
  • Which political party has presided over higher (and lower) market gains over time?

With the 2020 election only weeks away, you can expect to be inundated with doom and gloom predictions about the results. This candid conversation will give you peace of mind and provide you with the knowledge you need to get through the election feeling financially secure. Click above to listen now.

Or, click here for our free special report, Focus on Market Cycles, Not Election Cycles!

Episode Transcript

Steve Johnson:

With three weeks left before the election, join Director of Research. Jeff DeMaso and me to explain why keeping politics out of your portfolio can lead to long-term financial success.

Jeff DeMaso:

Hello, and welcome to another Adviser You Can Talk To podcast. I’m Jeff DeMaso, Director of Research at Adviser Investments. And today I’m joined by my colleague, Steve Johnson. Steve is a Vice President and Portfolio Manager on our dividend income strategy. Steve, welcome back to the podcast.

Steve Johnson:

Happy to be here today, Jeff.

Jeff DeMaso:

Excellent. Glad you’re here. We’re recording this on Tuesday the 13th, which means, and I’m not sure if you noticed, but we are just three weeks away from a presidential election.

Steve Johnson:

Yeah. I’ve noticed a few things on Twitter about it lately.

Jeff DeMaso:

Just a few, just a few. I don’t know. It feels like it’s dominating the headlines, airways, mind space, social media waves, whatever you want to call it. So let’s talk about the election and let me just be clear upfront, we’re not here to tell you who’s going to win the election in November. We’re not here to take one side or the other. When it comes to investing, we do try and leave politics at the door. I mean, of course we all have opinions and views on what “should” happen, but as investors, we have to try and deal with the world as it is, not necessarily as we think it should be. So we’re going to try and do just that. We’re going to try and talk about the election through a long-term lens, looking back at past history, try and put things in context and hopefully give you a little bit more of a level headed, take on the election then some of those headlines and what you’re seeing in your Twitter feeds.

Jeff DeMaso:

I think the place maybe to start Steve is one of my pet peeves. I often hear different pundits or headlines read, “The markets will crash if so-and-so wins the election.” So, “The markets will crash if Biden wins the election” or “The markets will crash if Trump wins the election.” And it happens every single election cycle. What’s your take on those types of articles and thoughts?

Steve Johnson:

Gosh Jeff, I am with you on that. So having client relationships and I’ve witnessed that firsthand, going back to President Obama and when he was elected, there were some clients who said, “Gosh, he is so far left. He is going to be so bad for the market and instead we saw stocks go off in 2009 on a bull market that lasted 10 years and 130 new all-time highs in the S&P 500 during that time. And conversely, I remember being awake, watching the returns for President Trump and watching the futures plummet by, it was more than a thousand points early into the next morning.

Steve Johnson:

And people saying, “Gosh, President Trump will be terrible for the stock market.” And again, we’ve witnessed so many new, all time highs in the S&P during President Trump’s tenure. So it is really the wrong reaction for any investor to have to believe that just because a certain party wins that automatically the market is going to crash because, as you know, I think investors try to look for easy answers. And so they’re looking for a clear relationship between, “if this party wins, the market will do this.” And as you know, better than most, obviously when we talk about economic variables, different sentiments, where we are with interest rates that has a much bigger impact than, than who wins the presidency.

Jeff DeMaso:

That’s definitely true. I took a longer history. I think the examples of the Obama presidency and the Trump presidency are great examples in near-term. We can all think back, remember them from our own experience. I tried to, as I usually do, dig through history a little bit, and I went back to 1976, which was an election year, but also the beginning of Vanguard 500 Index Funds’ history, so nice that they line up for this analysis. And I just compared three investors. One, who only invested in the stock market when Democrats were present, another investor who only invested when Republicans were presidents, and then a third who just stayed invested throughout that whole time period since 1976. And, surprisingly investors did better under a Democratic presidency. I was surprised by that. Usually Republicans are thought of as more business friendly, but I wouldn’t necessarily read too much into that difference between Democrats and Republicans.

Jeff DeMaso:

This is a reasonably short time period, only so many election cycles or presidential cycles. But what really stands out to me is the investor who just stayed invested more than roughly doubled the returns of someone who invested under the Democratic president and was up about eight times compared to someone who invested only under the Republican president. So it comes back to that idea that we always talk about is spending time in the market, not trying to time the market. And if you are going to time the market, doing it based on who sits in the White House, which party they’re affiliated with, doesn’t seem to be a great investment strategy.

Steve Johnson:

No, I mean, Jeff, that is so true because if you look at the power of compounding and, back to your original question about investors making the irrational decision to get out because of a certain party’s victory, you then have to ask yourself if you are an investor, “If I sell out now,” and as you’ve pointed out, the market goes higher, “When do I, when do I get back in? And how do I know if I was wrong in making that initial decision?” And even if I get out and the market heads lower, again, “What is going to be the reason that I get back in?” And I think it is such a hard decision, especially in this day and age where the news flow is, so quick and we have so much of it. It really presents a dilemma for investors as to decide when they would get back in or when they would admit that they were wrong.

Jeff DeMaso:

Completely agree. I hear that a lot. If you’ll say, “Hey, I’m just going to sit out in cash around the election. I’m just really nervous about it.” And I get it. These are emotional times and we are all wrapped up in it. We are citizens of this country. It makes sense that we are. But to your point, post the election, particularly if the “other” guy or other party wins, what’s your trigger for getting back in the market? What’s going to make you feel better about this situation? So that all-in, all-out mentality is really difficult, really emotionally difficult and hard to get right consistently.

Steve Johnson:

And I think you’ve pointed out in the past in some of our meetings, if you look at the months after an election, the November to January time period has actually been pretty good for stocks in election years. So by being all out, you could miss a good percentage of a year’s gains in those three months.

Jeff DeMaso:

Yeah, absolutely. It’s definitely kind of like the market just gets that uncertainty out of the way. It’s like, “Okay, we know who the president is.” And the markets can deal with it. Traders can deal with it. And it does tend to be a pretty good time, almost this honeymoon period between election and inauguration in there. So, even in the short term, markets can do well there. Let’s maybe talk a bit about, I think we’ve provided some context on elections and hopefully we’ve driven home the point of not trading around them, but let’s talk a bit about bigger picture of if one party were to win what that might mean for the markets. So Steve, Joe Biden is currently favored in the polls. So let’s maybe start there. What would a Biden victory mean for the markets in your opinion?

Steve Johnson:

So, Jeff, that’s a great question and I don’t want to offend anyone with my answer and understand that this is only an opinion. However, clearly, Vice President Biden and President Trump have different views on the economy. They have different views on healthcare, energy, finance, infrastructure, immigration, you name it, they tend to be very different. But one of the things that we’ve heard recently and over the past month and some people are attributing the market’s rise to this is that if you did see a blue wave, in which case the Democrats win Congress, as well as the White House, that you will see additional spending in the form of a very large infrastructure plan, as well as a clean energy bill. And so what we were looking at is, perhaps some of the cyclical industries, some of the materials, names that really haven’t done as well over the last couple of years. Maybe they see a resurgence with additional spending. And this additional spending, some people believe, will offset some of the higher taxes perhaps that Vice President Biden has proposed as it relates to both capital gains as well as income tax.

Jeff DeMaso:

I think you’re on there, Steve, that there’s opposing forces, within the economy and markets. Under a potential Biden presidency, I think you’re right. There’s the spending offset against higher taxes. To be fair, I might’ve set you up with a pretty difficult question here. The other day, you and I were talking about kind of how hard it is to pick sectors based on politics and you were talking about energy and solar stocks and how they have performed under Trump. Could you maybe talk a little bit about that?

Steve Johnson:

Yeah. It’s really counterintuitive and I would look at energy stocks. For example, when President Trump won, you would have thought that two sectors of the economy would have really prospered, right? You would have seen energy because he was talking about deregulation. He was talking about emphasizing coal again, and you also would have thought about financials, right? He was a real estate person. You would’ve thought banks and energy would have done very well and we really haven’t seen that. And in fact, as you mentioned, if you pulled up a chart of the XLE, which is just an ETF, which holds a basket of energy names, Chevron, Exxon, Conoco, and then you compared it to a, an ETF of solar stocks and alternative energy is called TAN, T-A-N and you compare the two charts. And what you would see is just a tremendous divergence.

Steve Johnson:

In fact, the TAN ETF, if you go back, gosh, five years, it was trading at roughly, $18 back in 2017. And today we’re looking at it at a high of $75. So enormous gains and you compare that to the XLE, the energy ETF, which in 2017, was trading in the range of $65 to $70 is today at $30. And so that’s a pretty wide divergence. And you would have thought that energy would have been a great sector to invest in, but even, not only would the President Trump, but if you go back to healthcare and I remember when talk about healthcare reform under President Clinton and actually healthcare stocks did very well during that timeframe, at a time when people thought that healthcare stocks would not do well because of the regulation and talk about a single payer back then.

Steve Johnson:

So, so really it is very hard. Now, clearly we think that, “Gosh, I think we’ve been talking about infrastructure for eight years.” And so the other part of that, Jeff, is that the market is a discounting mechanism. And so a lot of the price moves will be priced in before you even start to think about it. So I know that there’ll be, gosh, I think I’ve read five or six different election outcome reports from different firms over the last couple of weeks and each one of them has a similar theme. So they all talk about infrastructure. They talk about trade and what it means with China so we would just caution investors, if we’re all talking about it, the market probably knows that as well.

Jeff DeMaso:

Yeah. I mean, even just stepping back big picture, that idea that the real risk is the one that no one’s talking about. 2020 was the poster child of that example. I mean, who really saw a global pandemic coming and impacting the markets the way it did. So yeah. Sometimes it’s the risks that we’re not talking about that are the ones that can do the most damage.

Steve Johnson:

And I also think, everyone is, we have these thoughts that we have developed. Either they’ve been handed down from our parents, or we’ve watched them based on our network of choice as to what an election means, and if you go back in history, right, what’s amazing is so if you have a Democrat in the White House and a completely Democratic Congress, so that has happened, I think over the years, 33% of the time, a Republican president in an all Republican Congress, that’s been a little less of the time, 23%, but believe it or not, the gains are almost identical.

Steve Johnson:

And so we can predict and say, “Gosh, if the Senate turns Democratic and if Vice President Biden wins, this is going to happen.” And conversely, “If this happens, it’s so much better.” Clearly it’s not the case and so what we’ve seen is that the returns have been very similar. And then, the only period of time that we have in history, if you go back to President Obama term in 2011 to 2015 time, Congress was split there. And that actually that gave us the highest gain per year. But again, that is 3%. That is one incident over-

Jeff DeMaso:

Yeah, a size of one there.

Steve Johnson:

So it’s pretty tough to make any sort of prediction. I think you can cut the numbers any way you want in regard to a Democrat in the White House, a split Congress, but the bottom line is, as you’ve pointed out, if you invest over a longer period of time, you’re going to do significantly better than trying to predict the single party or your party affiliation.

Jeff DeMaso:

Well Steve, you kind of cut off my next question for you at the pass there. I didn’t want to give short thrift to potential second term President Trump. If there was a lesson from four years ago, it’s that you can’t count him out and that’s sometimes the polling doesn’t quite get it right. But it seems to me that you’re suggesting that, again, trying to make big sweeping changes to your portfolio or predictions about what that means for the market is a little bit of a fool’s errand based on the outcome of just this election.

Steve Johnson:

Yeah. I mean, I think trying to predict three weeks in advance who’s going to win or lose, and trying to make adjustments to your portfolio now, especially with the volatility that we’re seeing in the market is really too hard for any investor. And it just goes back to the point is that no president can prevent the market from falling. And so, if we look at every president has had a draw down going back to two, doesn’t matter if you’re a Democrat or Republican, right?

Steve Johnson:

So FDR had a big draw down. President Trump had a draw down. President Reagan had a significant draw down. And so it’s impossible to predict these draw downs in an election or in a presidential cycle because, now more than ever too we are, to your point, we are in a global pandemic. We have interest rates at levels that we haven’t seen in 50, 60 years. We have a Federal Reserve that said they’re willing to do pretty much anything to keep rates here. And we have the promise of large stimulus and spending so all of those factors are significantly more important than a president who, to be honest, probably gets too much blame for when the economy is not doing well and probably gets too much credit when it’s doing real well.

Jeff DeMaso:

Completely agree. Yeah. I think you said it well there. And I think, to really sum it up, by … I always try and talk to investors around this time of year that, if they can, they really should try and turn down the noise, whether that’s on their television set or their social media feeds. I mean, you can stay informed without following every headline and hanging on each headline and then thinking you need to react with your portfolio to that headline. And if you can turn down the noise, I do think that your portfolio, particularly over the long run, will thank you. Steve, are there any other closing comments that you want to share?

Steve Johnson:

I think you summed it up perfectly there. Investing lately has become, I think extremely even more emotional than I remember. And we are irrational beings, present company included, and we tend to make bad decisions based on emotion. And when you add politics, it just adds another layer of emotion that shouldn’t be involved in your portfolio.

Jeff DeMaso:

Yeah, we know these are emotional times and we do strive to be The Adviser You Can Talk To. So that’s why we’re recording a podcast like this. We also have a special report available, Focus on Market Cycles, not Election Cycles. You can find a link to that in the show notes. We will be hosting our quarterly webinar the week before the election and Dan Wiener and Jim Lowell, our chairman and CIO are planning to do a podcast right after the election. So whether you want to or not, you’ll be hearing from us plenty over the next several weeks. And of course, we’re always just a phone call away as well.

Jeff DeMaso:

This has been Jeff DeMaso and Steve Johnson from Adviser Investments, thanking you for listening to The Adviser You Can Talk To podcast. If you enjoyed this conversation, please subscribe and review our show. You can check us out at adviserinvestments.com/podcasts. Your feedback really is always welcome. If you have any questions or topics you’d like us to explore, please email us at info@adviserinvestments.com. As always, I’d like to thank Kaylie Steele and Ashlyn Melvin, our editors, for making this podcast a reality and thank you for listening. Stay safe and please remember to vote.

Podcast released on October 14, 2020. This podcast is for informational purposes only. It is not intended as financial, legal, tax or insurance advice even though these topics may be discussed. Information and events addressed in this podcast, as well as the job titles, job functions and employment of the podcast’s participants with respect to Adviser Investments, LLC may have changed since this podcast was released. For more information on each individual featured in this podcast, see the Our People section of our website.

The Adviser You Can Talk To Podcast is a trademark of Adviser Investments, LLC. Registration pending.

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To be honest, the president probably gets too much blame when the economy’s not doing well, and too much credit when it’s doing real well.


Steve Johnson, CFP®

Vice President

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