Mitt Romney sewed up his presidential nomination at the Republican National Convention, and Barack Obama has made his argument for re-election at the Democratic National Convention. It won’t be long before the presidential election is upon us on Nov. 6.
Will your portfolio be ready? Before a presidential winner is announced, business decisions and the markets are sure to bounce around in the lead-up to the election as political rhetoric ignites passions and causes mood swings in sentiment. For example, market watchers are anxiously waiting to see whether the Federal Open Market Committee announces a third round of quantitative easing, or QE3, on Thursday.
In short, now is the time for investors to batten down the hatches and prepare for changes both in Congress and the economy. (Expected legislative changes of concern for investors are the proposals to change tax advantages on municipal bonds and to raise taxes on dividend income.)
“I’d rather watch this storm from a safe harbor,” says Leon LaBrecque, managing partner of LJPR, a fee-only registered investment advisor and wealth management firm based in Troy, Mich., in a written comment.
Pointing to problems in Europe as well as Iran, LaBrecque warns that the greatest risk to investors looms right here in the United States, namely, the fiscal cliff. Shortly after the U.S. elects a president, he notes, the Bush tax cuts are scheduled to expire along with the payroll tax holiday on Social Security.
LaBrecque’s advice for investors is simple: seek shelter in lower-risk assets until the storms settle. “We’ve cut our equity positions 50%, and will wait out that portion in short-term corporate bond funds or exchange-traded funds,” he says.
But that’s just one point of view. Read on to learn what analysts from Russell Investments, OppenheimerFunds and more are saying about how to reposition portfolios in the lead-up to the presidential election.
Russell Investments analysts, in their updated 2012 Annual Global Outlook released on Aug. 28, expect market volatility to continue for the rest of the year, and the team expects only 2.1% real GDP growth for 2012 versus its earlier forecast of 2.5%. The team also lowered its forecast for the 10-year Treasury yield to finish the year at 1.8% compared with their initial December 2011 prediction of 2.6%.
Compared with their initial December 2011 outlook, however, the team has increased its year-end target for the S&P 500 to 1,375 from 1,300 and the Russell 1000 to 760 from 720, which would mean a 9% price return for the 2012 calendar year. With dividends added, that comes to a total return of just over 11%.
To sum it up, the Russell team’s forecast reflects better-than-expected corporate profit performance despite weaker-than-anticipated economic growth. (Note that the U.S. jobs report for August released last Friday shows that the nation’s economy added only 96,000 jobs last month, well below economists’ consensus expectation for 125,000 jobs.)
“The theme of our initial market outlook report for 2012 was that in a low-return environment, every basis point counts,” says Pete Gunning, Russell’s global chief investment officer, in the updated report. So far 2012 has unfolded close to Russell’s expectation, Gunning adds, but much could still go right or wrong over the remainder of the year.
“Making gains in this market environment requires an active, global, multi-strategy approach and identifying outperforming managers in every sector and region counts now more than ever,” said Gunning. “In a world of increased volatility and lower returns, we believe a dynamic approach to investing to take advantage of opportunities including nontraditional alternative as they present themselves will increasingly become the norm for successful investors.”
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Jerry Webman, chief economist at OppenheimerFunds, offers these paths for investors to consider before the Nov. 6 election if they’re looking for potential growth, income and inflation protection:
- Globalize an equity portfolio to gain access to well-run companies that offer exposure to the world’s fastest growing markets
- Prepare for the possibility of fiscal cliff-related volatility and economic weakness by adding or maintaining liquidity, particularly in tax-free securities such as shorter-term municipal bonds
- Look to dividend-paying stocks (and note that some dividends offer tax advantages), credit-oriented bonds and international bonds to potentially generate real income over the longer term
- Address inflation risks through exposure to equities and the rising earnings they may provide along with real assets whose market prices tend to keep pace with inflation
Dan Heckman, regional investment director and senior fixed income strategist with U.S. Bank Wealth Management, points to three pre-election events in September that will keep the bond markets active.
In a market and economic update released Sept. 5, Heckman points to:
- Comments made by Federal Reserve Chairman Ben Bernanke about the Fed’s commitment to QE3, which gave the bond market fuel for a rally in early September. “After hitting a low yield of 1.38% in July, the back-up in interest rates has subsided quite a bit after the 10-year Treasury hit a high yield of 1.86% in early August,” Heckman writes. “Sluggish economic data helped Treasuries rally last week as the 10-year Treasury fell 15 basis points to a yield of 1.56% on Aug. 31.”
- Long-awaited comments from European Central Bank President Mario Draghi on what steps would be taken to rid the European Union of its debt crisis. Draghi’s comments were highly anticipated and gave the markets a boost in early September.
- The release of the August unemployment report, which showed a gain of 96,000 jobs. “This report could dictate monetary policy actions by the Federal Open Market Committee. Anything below 100,000 jobs will likely propel the FOMC to take monetary measures, including the possibility of a third round of quantitative easing,” Heckman writes. “If the FOMC does decide to take action, they are likely to do so close to the September meeting date so there is some time before the November elections.”
What do these three events mean for bond investors?
“As long as the Fed and ECB remain loose with monetary policy, both the investment-grade and high-yield corporate credit sectors may outperform the Treasury market,” Heckman predicts.
Writing an “Enterprising Investor” column for the CFA Institute, content director Lauren Foster, who focuses on private wealth and behavioral finance, does the research and offers some pretty convincing evidence for why investors should just keep their money in equities throughout this U.S. presidential election cycle.
Here’s how Foster puts it together in her Aug. 31 essay, “Does the U.S. Presidential Election Impact the Stock Market?”:
“Over the past century, which party occupies the White House has had no discernible or consistent impact on U.S. equity markets,” writes Russ Koesterich, CFA, global chief investment strategist for BlackRock’s iShares ETF business.
”Presidential election years generally have coincided with favorable markets, particularly when the incumbent party wins,” says T. Rowe Price.
In a 2008 blog posted titled “Presidential Elections and the Stock Market,” Pete Davis concluded that “most of the studies show quite an advantage for equities following the election of Democrats, but a Federal Reserve study concludes there is no consistent relationship if you correct for market volatility and test back to 1852.”
Note: Doug Coté, chief market strategist at ING Investment Management, backs up Foster's research with his own comment about the current state of play in stocks. In a Sept. 5 commentary, Coté writes that using the S&P 500 as a yardstick, the equity market has historically "been priced at a price-to-earnings mulitple of 15.5. "Currently, it trades at a low 13.5 times earnings, reflecting excessive investor pessimism," he says. "If global risks were priced at the historical multiple, the S&P 500 could be 20% higher, at 1,550. Armageddon will have to wait. In our view, the best approach is to equate today’s global risks with normal volatility and stay fully invested."
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