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How Much Does Politics Really Affect Portfolios?

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With less than three weeks to the midterm elections, the question remains as to what impact this could have on investments.

According to the fourth-quarter 2018 Eaton Vance Advisor Top-of-Mind Index Survey, 65% of the advisors surveyed think the midterm elections will have some kind of effect on client investment portfolios. Broken down, 45% believe the midterms will have a positive effect and 20% believe they will have a negative effect.

During Eaton Vance’s annual investment perspectives media luncheon in New York, four different experts weighed in on the midterms’ potential impact.

According to some, like Richard Bernstein, politics may not have as much of an impact as these advisors think.

Bernstein said that the the midterm elections do not have a meaningful impact on his investment outlook. Bernstein is CEO and chief investment officer of Richard Bernstein Advisors LLC, an independent investment advisor that subadvises two Eaton Vance mutual funds.

“One of my first bosses on Wall Street really pounded into me that it’s ‘profits not politics that move the markets,’” Bernstein said.

While he admits politics can have a short-term impact, the focus should be on fundamentals  — both of companies and of the economy — because that’s what’s going to drive the markets longer term.

“Could you have volatility in November around the elections? Yeah, probably,” he said. “The question is if you have volatility and the markets go down … the question is do you buy or do you run away? And that answer is going to depend on the fundamentals. It’s not going to depend on the politics.”

Bernstein said his firm doesn’t look at short-term politics.

“Clearly, the fundamentals of the economy don’t change tweet by tweet,” he said.

One of the predictions that was made after the 2016 election was that there would be a “Trump bump” in responsible or environmental, social and governance (ESG) investing as a potential reaction to Donald Trump’s presidency.

According to Jade Huang, an ESG senior equity analyst for Calvert Research and Management, there was a “bit of a ‘Trump bump.’” Calvert Research and Management is a wholly owned subsidiary of Eaton Vance Management.

However, Huang thinks the midterms won’t have a huge impact on the demand for responsible investing.

“There is enough impact being driven from consumer trends and interests for healthier products, cleaner air, cleaner environment, that are really driving companies regardless of the policy environment,” Huang explained. “We kind of saw that after the Paris agreement and the U.S. withdrawal, that states went ahead, corporations continued to go ahead and that momentum continues.”

Huang doesn’t think that the policy environment will matter “that much” to Calvert’s investment outlook because they are long-term investors.

According to Huang, Calvert tries to look past the politics and, rather, looks to companies that are trying to meet some of these consumer demands.

While Huang and Bernstein take a lax position on the midterms’ impact, Kathleen Gaffney, director of diversified fixed income at Eaton Vance Management, does think politics can have an impact on the investment outlook.

According to Gaffney, politics is a “much bigger factor” in investments today than it was 20 years ago or more.

“I think we are moving into a new environment, and the biggest transition that I see that is relevant for fixed income is that we’re transitioning from monetary policy driving the markets to fiscal policy,” she explained. “So, it is the politicians that are essentially making policy decisions that will impact growth and inflation, which is what I care about when I’m doing basic bond math.”

As Gaffney sees it, the strength of the fiscal stimulus still has yet to hit, so growth is going to continue and rates are going to move higher.

“We are at the very beginning of what I believe is a secular rise in interest rates that will be driven by policy decisions by governments,” she added.

Yana Barton, equity portfolio manager at Eaton Vance Management, agrees with both arguments.

“Politics shouldn’t impact your decisions as it relates to the investment, but policy stemming through those politicians should,” she explained.

For example, regulatory and tax reform has lifted the equity market over the past couple of years, in particular this year, which Barton says is on pace to have more than 20% earnings growth.

Barton also pointed out that “historically speaking” a Republican-led White House and split Congress — a likely outcome of the midterms — has not been positive for the equity market.

“You’re gridlocked, so policy stemming from that split Congress doesn’t really come to task,” she explained.

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