Election Results And What They Mean To The Markets

Company | Provided by Cornerstone Advisors

Cornerstone Two Minute Take is a periodic feature where we offer a concise take on a relevant topic. The following piece was written on November 7, the day before the election.

In election years, we understandably get a lot of questions asking how specific outcomes may impact the markets. People often ask what the markets will do if a certain candidate gets elected, or how we as wealth managers prepare for the range of outcomes. As this is one of the more unusual elections we’ve seen in a while, we decided to make our answers public.

Whether it’s the outcome of this presidential election, or some unforeseeable event after the election, it’s important to remember that uncertainty is something that will continue to exist around the world. The presence of uncertainty is why we have the opportunity to earn a higher rate of return on our investments; otherwise, we would only earn the “risk-free” rate.

The most important thing to understand is this: markets don’t really care whether we’re electing a Republican or Democrat. Markets are apolitical. What markets like is certainty. By their very nature, elections represent uncertainty. Markets want to understand the outcome so they can price assets appropriately. Of course the converse is true as well; markets dislike uncertainty.

Famous value investor Benjamin Graham once said, “In the short run, the market is a voting machine. In the long run, it’s a weighing machine.” Markets go through cycles. They have peaks and troughs. And in the short-term, investors’ emotions accentuate the fluctuations. But in the end, they accumulate value based on a rationale assessment of the future cash flows available to their investors.

We don’t know how high the peaks will be, how low the troughs will be and how long the cycle itself will be. But we know that markets go in waves, and they create opportunities for investors over time to create real value. In order to get that long term value of assets appreciating, you need to be able to commit to it long term. It comes down to what time frame you’re using to define investment success.

You can’t consistently time the cycles – either their frequency or their magnitude. You need a diversified portfolio that smooths those cycles out so that the peaks and troughs aren’t so high or low, allowing you to stay the course, so that you can reap the benefits of being a long-term investor. We want our clients to understand that we’re not looking at one quarter, one year or even a ten year exercise. This is a 50 year exercise.

So getting back to the original question: how does the election impact how we invest? In short, it doesn’t.

It’s not that we think election results are unimportant. They’re important for many reasons. The thing is we can’t know their outcomes or their impact with certainty. And even if we could know the results with certainty, these kinds of movements are such a short term phenomenon to matter to us.

Right now we have an economy where economic growth is improving, consumer balance sheets strong and corporate profitability has been getting better. We see a strong domestic economy and an improving global economy. The long-term fundamentals of the economy and the valuations of assets in the marketplace will determine the opportunities for investors going forward.