How should advisors view the coming presidential election, which is beginning to unnerve some investors?
Although the overriding philosophy of the industry is to avoid market timing and stick with strategies that conform to investors’ long-term financial plans and goals, the unusual nature of this presidential election may be leading some investors to question that approach.
A recent UBS survey of more than 2,300 affluent and high net worth investors found that almost 80% view the U.S. presidential election as a “game-changing” event that will affect their financial well-being.
Gary Shilling, the founder of his namesake investment advisory and economic consulting firm, writes in his latest market outlook that “until the election is settled, and its aftermath clearer, we suggest lots of cash in your portfolio,”
When asked how much cash? Shilling answered, “Thirty to fifty percent, depending on the portfolio.”
That’s a lot of cash, especially for portfolios focused on the long term. Investors would have to sell a big chunk of their assets to have anywhere near that much cash, assuming they haven’t already hoarded piles of it.
To that comment, Shilling responds, “There’s a tradeoff between long-term convictions and short-term sustainability [and] this is the most extraordinary election our lifetime.”
There are several reasons for why this election is an extraordinary one, not the least of which is the lack of government experience by Republican candidate Donald Trump and his unorthodox campaign, which at last count lacks the support of 14 Republican Congressional members – seven senators and seven members of the House – as well as three sitting Republican governors plus Mitt Romney, the 2012 Republican presidential candidate.
In the past, the only presidential nominees of a leading political party who had never held elective office served either as a national military leader (Washington, Grant and Eisenhower) or in a presidential cabinet (Taft was Secretary of War under President Teddy Roosevelt; Hoover was Secretary of Commerce under Harding and Coolidge). Newspaper publisher Horace Greeley is an exception since he started out as the candidate of a third party – the Liberal Republicans – before running also as a Democrat, and losing.
Sam Stovall, managing director of U.S. equity strategy for S&P Global Market Intelligence, agrees with Shilling that holding more cash makes sense in such uncertain times, which is not unusual when two nonincumbents are running for president.
In the six presidential elections since World War II when nonincumbents competed for the job, the average annual stock market decline that year was 3.3%, says Stovall. But stocks fell in only three of those years and rose the other three, so investors “may not want to bail out of the market altogether,” says Stovall.
In addition, says Stovall, stocks rose more than 70% of the time in the three months before a presidential election, dating back to 1900. When that has happened, the incumbent party was the more likely winner. According to a recent InvesTech report, of the 14 instances since 1928 when the S&P rose during the three months before Election Day, the incumbent party won.
Stovall has not changed his allocation for a balanced portfolio model, which retains a 60/40 split between stocks and bonds, the latter including about 5% cash, but he notes that current high stock market valuations may be a reason to hold a little more cash currently.
“Valuations are elevated,” he says, “[but] volatility according to the VIX is not, so when you least expect it, when things are pretty calm, you can end up being blindsided.”
Stovall says that trailing 12-month P/Es on the S&P 500 are near 25 times compared to 22 in previous low-rate environments and forward 12-month P/Es are at 18 times compared to the average of 16.2%.
The UBS survey of affluent and high-net-worth investors found that nearly half (47%) are considering reducing their allocations to stocks ahead of the presidential election while 9% have already done so, including 5% who have pulled out of stocks entirely.
In addition, one-quarter of those surveyed are considering cashing out of stocks entirely and many continue to hold onto a 20% allocation to cash.
Despite these concerns, many financial advisors caution that investors should not make any major changes to their allocations ahead of the election. “Market timing never works in the long run, and the election season is no exception, even given how bizarre it is,” says Robert Braglia, president of American Financial & Tax Strategies in New York City. “People should maintain their original allocations, based on their individual goals and risk tolerance and rebalance from time to time.”
But Braglia suggests that if investors want to speculate, “they can take 5% of their money and go long or short on health care companies or defense contractors … or whoever they think will prosper or suffer if their guy or gal gets to 270,” referring to the number of Electoral College votes needed to win the presidency.
Russ Koesterich, chief investment strategist at BlackRock, wrote in a recent report that health care, energy and utilities could very well be affected by this year’s election results.
Leon C. LaBrecque, the CEO of LJPR Financial Advisors in Troy, Michigan, says he’s staying fully invested for now but is keeping “an eye on things.” He doesn’t favor cashing out of positions because that “only works if the market tanks and then you jump in.”
A better option for nervous investors now, says LaBrecque, would be to “buy some insurance in the form of an index put. Go look at the volume on Nov. 18 SPY puts.” If the market goes up, the investor loses the cost of the put, but if it goes down, the investor has protected his or her equity position, says LaBrecque.
Eventually, as we get closer to that first Tuesday in November, the market will begin to price in the presumed victor, says Ryan Fuchs, a financial advisor at Ifrah Financial Services in Frisco, Texas. “Nobody knows for sure whether there will be a positive, negative or neutral effect when the winner is determined.” In the meantime, he recommends that investors focus on insuring that they have a “long-term plan in place with an appropriate asset allocation for their situation and a well-diversified portfolio.”
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