The elections are over, now what…
With the elections behind us, we now begin to reckon with what comes next. Many face the transition coming to Washington with dread, anger, even despair. Others feel joyfulness, vindication, and believe that their long-ignored needs will finally be met. There are several important lenses through which we could view this election and what has led to these decisive electoral results. I write from the perspective of a financial planner. Forgive me if this comes out as too clinical or dispassionate.
I interpret these elections as, among other forces, the result of long-term chronic income disparity primarily due to stagnation of the middle class. The policies of free trade zones and globalization pursued by successive presidents, both Democrat and Republican, led to great wealth creation in America; but that wealth was not widely distributed. The affluent and ultra wealthy became much richer. Programs aimed at the very poor can arguably claim significant progress.
But large swaths of the population, especially those without college degrees or skills suited for the “knowledge economy” and the “information age” have seen their standard of living – their ability to provide for their families – steadily erode. And they don’t like it. They believed in the promise of the American dream and are outraged that they haven’t been able to achieve that which they see as rightfully theirs. They want someone to blame. The new Republican party (MAGA), speaking with provocative rhetoric, used a complicit media to present a long list of others against which to focus their grievances.
Now we enter into a time where it feels like anything can happen. And why not? The twenty-first century seems to have taught us that a) anything is possible, and b) things might not play out in the way you first envisioned. As investors prepare for what might lie ahead, what possibilities are in fact on the table? What’s likely to happen?
Winning is easy, governing is harder (thank you Hamilton).
Whether you fear or revel in the clean sweep by the GOP, hold on before you assume the future is a fait accompli. The various factions now consolidating power do not have much history of playing well together for very long. It may prove hard for them to coordinate to actually meet the many promises made during the campaign. And are we sure that the massive egos now taking their victory laps will continue to give space and deference to one another once they gather in the Oval Office? I’m tempted to argue that what we are seeing might be peak MAGA.
Conflicting priorities with a coherent plan or …
We should all hope that the GOP economic policies prove successful. Their voters have received many promises: myriad tax cuts; prompt resolution to their litany of grievances; reduction in government waste and fraud; elimination of inflation; lowered interest rates; all while bringing China to heel, resolution to wars in Ukraine, and on and on. However, while these policies are likely to spur growth, they may also become inflationary. And while tax cuts are nice, they could increase the deficit, which could drive up interest rates. Higher rates and inflation could choke out economic growth, which would violate a core GOP promise…
Further, in spite of all the recent populist fervor, corporate America expects a return on its investment in this election. I can imagine looming conflicts between corporations and rank and file workers during this time of falling population growth and mass deportations of potential labor. All this is to say that a mishmash of campaign promises, made to appease constituents who might have opposing priorities, could lead to a very tumultuous midterm round of elections only two years away. To preserve their current advantage, the GOP better get it all right, fix everything, fast.
If you’re fearful, you have some justification, but…
The current good mood on Wall Street could go too far and lead to a speculative bubble. Think: Tesla/AI/Bitcoin euphoria that surges ever higher… until there’s a pop. The problem with bubbles is that they go on much longer than you want them to. By the time a bubble is ready to deflate, you too have been drawn in because you finally decided that you will join the party since everyone else is making so much money and you just want yours. To this I say, remember 1999. The dot-com bubble looks obvious in retrospect, but it still sucked everyone in. The Nasdaq index rose 86% in 1999 alone, and peaked on March 10, 2000 before it lost nearly 80% of its value between 2000 and 2002[1].
There were those who predicted this, but no one listened. Then Fed chairman Allan Greenspan warned of “irrational exuberance” in 1996, fully three years before the bubble’s peak. Only the most patient of investors were able to avoid the hype back then. If this happens again, how patient would you be? Would you be satisfied with solid but not spectacular gains?
Maybe the bubble scenario isn’t the one to fear. Maybe the problem will be more of a creeping systemic risk like the period 2005 – 2007. Before the Great Financial Crisis almost ruined us all, a deregulatory binge led to opaque and massive levels of risk by many players and institutions. If this type of systemic risk happens, it is unlikely to occur in just the same, easily recognizable manner. Maybe it comes in a meltdown in bonds. Maybe in healthcare. Or the power grid. It will take careful vigilance and skepticism to watch it develop and position accordingly.
There is also a strong bull case
Okay, before these prior paragraphs cause you to change all of your holdings into bitcoin, Krugerrands, and dry goods, let’s take a breath. Remember that the market has been very durable. It’s withstood the pandemic. The recession that was endlessly predicted has not yet materialized. In fact, this two-year bull market is relatively short by historical standards. Corporate earnings have been strong, inflation has fallen, rates have stabilized and come down on the short end. Measurably, times are good for investors and could certainly continue to follow this momentum.
Muddling through the messy middle?
Another very real possibility is the messy and volatile middle road. Under this scenario, markets could move up and down in cyclical chop but don’t cover much ground in a 1970s style stagflation malaise. Is this even possible during this era of AI-driven new industrial revolution? Possibly, for a few years anyway. Some are making the argument that the high stock performance of the past two years was because growth from future years was “pulled back” into this time period. That would mean that market growth could become more subdued. I think there’s a lot to this argument. It doesn’t mean no growth. But instead of double-digit performance like this year, we might see only a few percentage points. Okay, but not great.
My Recommendation?
Before the elections I said I was not recommending any big bets into say tech stocks or small caps in hopes of some specific outcome. But I realize now that the bet I was in fact making was that the system would continue to function and that the worst fears would not be realized. Though we may/may not like the outcome of these elections, the process produced a clear result, efficiently. For this the market breathed a great sigh of relief.
My guess (more than a hope) is that the overall system continues to function. This means we could see a variety of corporate winners and losers, with surges and pullbacks. Times of fear and greed. But overall, the structural trend of stocks may continue to be upwards. This favors investors who stay in the game, play it cool, and manage their expectations.
However, if you feel just awful about the state of things, then maybe you should do something, thoughtfully. It’s another way of saying that you may no longer be a match for your current allocation plan. If you are in a growth allocation model for example, you might decide to notch down to moderate. This may increase your sense of confidence, knowing that you have at least taken some action. The drawback would be that if/when the market turns, you would underperform. Reducing volatility means reducing the downside, and the up. Breathe. Read. Meditate. Think.
Final thought…
Throughout Biden’s tenure, economic numbers have been strong. But higher price levels from inflation left people feeling poorer, thinking that the American Dream is no longer affordable. So they did what people have done throughout history: they punished the incumbent (no, inflation was not all Biden’s fault, but he nonetheless got the blame). Investors did well while mainstream consumers struggled with affordability. I feel for the busy family trying to make ends meet. But the investor needs to keep his/her eye on that which drives the markets, not exclusively on the price of eggs or car rentals or day care, and definitely not on cable news media or partisan podcasts. If your investment decisions were influenced by grievances about Biden’s inflation, you missed a lot of growth in the stock markets. And now today, disappointed voters on the left should be careful not to make a similar mistake. Don’t let the election outcome cause you to disregard the underlying health of the economy. This market seems to have momentum and could well grind higher for many months into years.
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
[1] dot com bubble definition – Investopedia