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.