By Michael McKeown, CFA, CPA - Chief Investment Officer
Political values are important to individuals, but mixing politics with portfolio decisions is not profitable on a consistent and repeatable basis.
Analysis based on fundamentals and the valuation of asset classes is what matters for investments. We plan to stay in our lane and take a non-partisan view to what this election means for the economy and investments.
It is difficult to discern the planned policy implementation of Republican President-elect Trump based on his campaign. Nonetheless, the control of the House of Representatives and the Senate by Republicans means that aggressive change may be coming and we will see healthcare, interest rates, trade policy, tax policy, and fiscal policy set off on a new course from the previous paths. The unknown for these changes is the implementation timeline, the magnitude, and unintended consequences.
Aurum maintained a long running assumption that the coordinated executive and legislative branches of the government would be bullish for the domestic economy. Trump proposed tax cuts and fiscal spending (both areas we implored for cooperation in over the last five years). Specifically, he discussed infrastructure spending of $500 billion to $1 trillion in addition to individual federal tax cuts. Of course, this does not align with the more vocal wings of the Republican party as it would increase the federal budget deficit. If passed, though, the likelihood of higher growth and inflation would be probable. This would be a net positive for wage earners and the economy overall. The rise in inflation expectations would push up yields on government bonds (as of this writing, the 10-year Treasury is up 0.26% from the overnight lows to 1.96%).
At risk are global trade and companies tied to exports. Protectionist policy could offset the positive domestic economy to a certain degree. Despite the initial reaction by the currency markets, this should be good for foreign currencies against the U.S. dollar.
Geopolitical risk is another key area of concern. Given the campaign rhetoric, it is unknown what policies will or will not be implemented; but a heightened sense of uncertainty could cause greater global stock market volatility.
Just like pilots do not take off without a contingency plan for a storm, our investment committee laid out plans for multiple scenarios. This includes analyzing and maintaining the prices at which we would be willing to commit more money to stocks and bonds. This is a constant process that occurs regardless of political events or elections.
We believe the largest new opportunity is in the global bond and currency markets. Today, our analysis shows that we are getting paid the most in the last ten years to own a thoughtfully constructed global bond portfolio.
In an emotional time (both exhilarating or outright negative), this is a period to look at lessons from behavioral finance. Emotions drive decision making in most areas of our daily lives, and we simply rationalize those moves to ourselves. Awareness of the psychological shortcomings (from hindsight bias, to recency bias, to loss aversion) can help prevent mistakes that can plague long-term investment results. Being the strong hand of investing does not mean buying or selling on a whim. It means thoughtfully incorporating changes in fundamentals and executing on the investment plan. As we gain clarity on what the pending shifts in policy are, we will keep you apprised of the effects on the economy, client financial plans and portfolios, and the changes we implement to capitalize on the situation.
If you have questions or comments, we welcome the opportunity to discuss the election implications further.
This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.