I may not win many friends by referring to the current wrangling on Capitol Hill in Washington as a political nightmare, but since I don’t report on these events as a beat journalist, I can afford the occasional mordant comment.
I doubt that many will object to my choice of words to describe the current goings-on. The accusations between Republican President Donald Trump and his critics are growing stronger daily. Meanwhile, Democratic Party contenders for the presidential nomination are trying to outdo each other in staking out their positions in the growing pressure for Trump’s impeachment.
As the situation stands at time of writing, the prolonged election cycle in the United States means that questions over the continuing occupancy of the White House by Trump will dominate until the next election 14 months away.
Last week, we saw textbook proof of the connection between politics, geopolitics and market volatility as investors reacted to the headlines. Whether that will continue or whether, as some have suggested, investors become increasingly immune to those unsettling headlines remains to be seen.
As well, the possibility of impeachment, though mathematically questionable, also hangs over the American economic scene and could impact the U.S.-China trade dispute. The possibility might also influence economic and trade relationships
with other countries. The turmoil further threatens to overshadow domestic economic issues such as projections for slowing growth in gross domestic product and interest rates. Some companies may be vulnerable as a result.
These tensions, in turn, lead to questions about the potential effects on the stock market.
With all of this unfolding, investors need to balance their outlook between a far right and potential far left candidate, suggests Jay Nash, Senior Vice-President, Portfolio Manager, Investment Advisor at the National Bank and a 21-year veteran of the financial sector.
Moreover, unlike earlier cycles, the current political scene does not offer many ‘safe harbors’ to reassure investors. That has developed because the leading candidates -- Trump and the Democratic contenders -- propose to take policy in very different directions if elected in Fall 2020. That makes the outlook for bonds more confusing than usual.
The net effect of the recent rate cut by the Federal reserve is also unclear. The cuts might push the economy higher in the short term, providing an extended expansion. That might lift inflation or delay a recession, Nash says.
Those who increase bond holdings now will win if rates continue going lower; however, they could lose if inflation jumps and rates rise.
At the same time, governments and politicians continue to buy votes using money that they do not really have, and that triggers another set of problems. One investment strategy is to focus on investing in major multinational corporations that operate in multiple jurisdictions, Nash explains.
Microsoft (MSFT), McDonalds (MCD), Starbucks (SBUX) and Apple (AAPL) might not be immune to short-term volatility, but they are unlikely to be seriously derailed no matter what political party occupies the White House after the next election.
Cash-rich companies like Microsoft and Apple can experience a pullback in price when equity markets retreat but are unlikely to go out of business or suffer a permanent decline. At the same time, small cap companies without diverse customer, product and financial bases might suffer in a recession and are more likely to face bankruptcy.
Meanwhile, increasing portfolio holdings
of cash provides three benefits: a cushion against surprises, a fund for buying opportunities and reassurance for nervous investors.
As a precautionary note, if the current political statements by the Democratic Party remain as strident as at time of writing and if it appears that they have a reasonable chance of winning, Nash suggests that might point to an underweight in equities in November 2020, perhaps to 10% below long-term target levels.
The only thing that seems certain at this time is that the bitter wrangling will continue until November 2020. It can be argued that investors are unfairly caught in this protracted election cycle, which started almost two years before the election date. We still have 14 months’ worth of possible changes and we are 10 months away from having a reasonable view of the outcome.
As the political scene stands right now however, Nash says more drastic changes are not necessary. He recalls that in November 2016 when Trump won the Presidency, many expected a negative stock market reaction. However, while there was volatility overnight, the negative reaction was limited. The markets were up starting at 9:30 a.m. on the morning after the election and have never looked back.
Every investor is different and so is every portfolio. For those who feel concerned, Square One would be to ask a professional advisor to check the portfolio for strengths and vulnerabilities over the next few months.
Disclosure: I do not own any shares in any companies mentioned in this article and have no plans to invest in them.
Related: Volatility, Confusion and Portfolios