PFG News and Blog

4th Quarter Market Review

I’M MOVING TO CANADA- the quadrennial wailing from approximately 50% of our fellow Americans that breaks the crisp November air. This just doesn’t make sense to me. First off, the math doesn’t add up. The typical American adult only lives 18 miles from their mother (myself proudly included). Secondly, it goes against nature to migrate north for the winter. Geese, wildebeest, and jet-setters go the other way. Don’t get me wrong; I like Canada. I actually love Canada. Have you ever seen the beauty of Whistler and Lake Louise or the cultural gem of French-Canada? Well, neither have I, but I’ve heard great things. So, when November comes if you end up on the shortend of the stick politically, then go ahead and move to Canada. Now’s a great time to be selling your home - just don’t sell your investments. It’s like migrating north at the outset of winter – a bad idea with potentially dire long-term consequences. By no means am I trying to be down-play the importance of the upcoming election. There really is no greater voting decision out there than who should be the elected leader of the Free World. What I am saying, though, is that investors who stay the course fare much better than those who invest only when one of the two major political parties controls the White House. If you were a Democrat who decided to pull your money from the market once Ronald Reagan was inaugurated in 1981, you would have subsequently lost out on a total return of 130% over the next 8 years. And, just as similarly, if you were a Republican who put all your money in cash once Barack Obama became President, you would have missed out on a total return of 119% through 2015. Graphed below is the performance of a $10,000 investment dating back to the turn of the 20th century versus only investing while a Republican or Democrat is in office. Democrats should not use this graph as a partisan weapon to show market outperformance versus Republican presidencies as both returns are absolutely terrible compared to the cumulative effect of putting politics aside when it comes to investing. Looking more specifically to what happens during election years, the historical data shows that they have generally been pretty good for the stock market. In the postWorld War II era, The S&P 500 Index has risen 81%

of the time in election years and posted an average return of 6.6%. Why has this happened? The short answer is that nobody knows for sure. Stock market returns are the result of many different factors so it’s not always possible (or recommended) to draw a direct line between politics and portfolio returns. While we have been discussing the historical returns associated with elections, we recognize this year’s election may not follow the historical script. First of all, many people just don’t care for the two main candidates. Polls give the two candidates the highest un-favorability ratings of any Republican or Democratic presidential nominee in the past 10 presidential election cycles.


One lingering fear investors may have is that the markets could suffer if the public elects a president who is already very unpopular. Here again, though, history suggests the market is resilient and indifferent to a president’s current approval rating. As graphed, dating back to the Kennedy administration, markets have actually performed their best when presidential approval ratings range between 35-50% favorability with an annual gain of 11.8%. Regardless of the election outcome gridlock will continue to reign supreme in Washington. With political polarization and partisanship at levels not seen since the Civil War a Democratic or Republican election night sweep with filibuster proof majorities would be required to push massive legislative changes forward. While possible, that result is highly improbable. Just like Republicans and Democrats could decide to hold hands and start singing in harmony around a common campfire, but that probably won’t happen either. It’s So Bad It’s Good We are now 91 months in to an economic recovery that is about as unpopular as the presidential candidates. The recovery from the global financial crisis has been historically weak, but within this weakness lays our economic salvation. Bull markets don’t die from old age, but rather from euphoria, and euphoria stills seems in short-supply. Households and corporations are still being extremely cautious when it comes to spending. Apple has more cash on hand than the total annualized productivity of 141 separate countries. Individuals have been so leery to spend that many banks are actually charging negative interest rates around the globe to deincentivize this savings glut. These are not the tell-tale type signs that typically presage a market collapse. Furthermore, companies are firing workers at a historically low rate and wages in 2015 increased by 5.2% - the largest percentage increase in the history of the data back to 1967! Could the markets and overall economy be better? Absolutely but, more importantly, they could be far, far worse. 




Moving Forward

Experience has taught us it’s probably best if we keep our voting and investing decisions separate. From an investor’s perspective, there is probably one key fact to bear in mind about this election: Well-positioned, well-led companies will create investment value regardless of who sits in the White House. If anything, the volatility of 2016 has exemplified the necessity to avoid making knee-jerk investment reactions. This principle was best exemplified by the markets’ 5% decline in the immediate reaction to the British European Union exit surprise vote. While some predicted this was the beginning of a worldwide sell off, we urged our clients not to panic and we are now up over 8% from that immediate dip. Obviously, we do not have a crystal ball through which we can see the future. However, experience has shown a disciplined investment approach usually outperforms attempts to race ahead of the crowd in responding to current events. Therefore, we include non-correlated investments (a fancy way of saying investments that tend to move in the opposite direction of overall market conditions) in our portfolios to help reduce volatility. At the same time, we are always looking for opportunistic growth by increasing exposures in assets that demonstrate newfound, long-term value, while constantly searching for ways to reduce costs and create greater efficiencies. The underlying economic data is still trending positively – however, there are real risks facing a well-diversified investment strategy as always. Could the upcoming election lead to increased volatility - of course? Could the Federal Reserve raise rates at the very end of the year leading to a momentary downturn akin to 2015 – Yes? Our job is to try to navigate these risks, and corresponding opportunities, as they inevitably present themselves - even if we move to Canada. As always, we thank you for your continued trust, confidence, and support in our investment process, long-term strategy and constant vigilance.