Hillary Clinton versus Donald Trump:
Which One is Best for Your Portfolio?
"Be aware of politics; don't get
involved in politics."
- Dr. Chuck Kwok
The quote above is from the international finance professor I
had in graduate school. Dr. Kwok gave us a list of things he wanted us to think
about when we ventured outside the classroom into the business world again. I
think this is sage advice and, although he meant it for the business
environment, it applies to the real world too - especially when making
investment decisions. The U.S. presidential election is only a couple of months
away and several clients have asked how we're positioned for this change in
power coming in November. Given this, I want to provide my opinion on this
election's implications on your investments and the stock markets.
Please note that I am not taking sides here; my only concern is
what effect the candidates/election may have on your portfolios. You don't pay
me for my political opinions. You pay me to watch your money, so that's my only
motivation.
I want to begin this topic with a question for you. Would you
expect the stock market to do better under a Republican or Democrat? Most
people say Republican. Why? Republicans are perceived to have more
business-friendly policies than Democrats. Yet, according to a recent Kiplinger's article, it turns out that for more than a century now, the Dow Jones
has done slightly better under a Democrat (9% per year versus 6% for a
Republican).
One also may think that, given how business-friendly the U.S. is
relative to the rest of the world, our country would have the strongest stock
market. However, that's not necessarily true either. According to Triumph of
the Optimist (based on a study by Dimson, Marsh, and Staunton), from
1900-2000, Sweden, Australia, and South Africa had stronger stock market
returns - three countries that tend to be more socialistic than capitalistic.
At the end of the day, presidential elections and political
parties are insignificant factors in how we position your portfolio. Despite
what you read and hear on the news, it's noise.
Yes, the president could do some damage. Our commander in chief
could push tax increases and is said to have the power to alter trade
agreements, which could cause problems for business if a trade war occurs and
tariffs are imposed. Deporting illegal immigrants could cause harm also. As The Economist reported recently, Arizona is an example of the implications caused by
deporting immigrants - a crackdown on illegal immigrants in 2007 shrank the
state's economy by 2%.
As it stands now, Clinton is up in the polls and market returns
are increasing. The market may not necessarily believe she is better for
business, but it seems to take comfort in what is more known or certain versus
what some perceive to be unknown or uncertain. Translation: We may not like
Hillary, but we know what to expect if she is elected; with Trump, the market
is unsure what will happen. In fact, a business and finance reporter for The New York Times recently mentioned that, "If Mr. Trump were to start polling strongly
against Mrs. Clinton shortly before the presidential election, while still
pledging to introduce tough protectionist trade policies, the stock market
would most likely sell off on fears of what those policies might do to the
economy." (Don't kill the messenger.)
At the end of the day though, no one definitively knows what
each presidential candidate would do once taking office. Plus, most of the
returns stated relate to the Dow Jones Industrial Average and the S&P 500 -
two indexes that measure the performance of large blue-chip companies in the
U.S. only. Our stock portfolios consist of large, mid-size, and small
companies in the U.S. and international markets. In fact, nearly half of
your stock portfolio is invested in securities of companies (via mutual funds
or ETFs) domiciled outside the U.S.
In other words, the U.S. presidential election is only one piece
of a very big pie. Our election won't necessarily have an effect on, let's say,
Brazil's or India's stock market. Moreover, instead of focusing on what's going
to happen this year or next, we are focusing on what will happen with stocks
over the next five years. That means ignoring the election and favoring a
strategy backed by strong academic research. To do so, we zero in on companies
that are: selling cheap relative to their book value and have strong
profitability and good growth potential. So, Dr. Kwok had a good point. It's
okay to be aware of politics; just don't let it impact your investment decisions.
