Market Update Sep/Oct 2016
The most common question we have been asked over the last few months is “How is the election going to affect the market?” The second most common question is “What is going on in the market?” In the coming paragraphs we will explore both of these questions.
First, “How is the election going to affect the market?” The answer to this is complex but in summary the election will most likely not have nearly the immediate impact as many, would have you believe. Through checks and balances the power of the president is limited. This in turn limits the effect they can have on the economy and by association the markets. Despite checks and balances presidents often do influence policies and legislation; however, the positive/negative repercussions of that influence are typically not fully realized for many years.
Over the long term markets are by and large driven by the profits and earnings of companies. As companies grow their profits and earnings, markets tend to grow as well. In that regard there is very little a president can do immediately upon entering office that would dramatically alter the trajectory of growth. The short term influence that the election will have on the stock market is largely caused by uncertainty. The market does not like uncertainty and it is hard to imagine an election with more of it. As a result, we expect continued volatility but are not deviating from our typical long term perspective.
Please do not misunderstand us, this election is important for the long term future of our great country. Appointing new Supreme Court justices, international trade relations, and security are all very important issues and can influence markets. Despite the importance of the election we are of the opinion that the election will not be the key driver for markets. That brings us to the next question.
“What is going on with the market?” In two words, interest rates! Many are confused by the rise of the US stock market despite a sluggish economic recovery but we think this makes a lot of sense. If we analyze the full spectrum of investments available many types of investments are currently less, than appealing. With sustained low interest rates CDs, bank account, short term bonds, and other traditionally safe investments are currently yielding next to nothing. The unattractiveness of so many investments has forced many investors to look to the equity markets for reasonable returns. This has contributed to the rise of stock prices. The question we are now faced with is; how will markets react when interest rates rise? From our experience we know that many investors would be more than happy with at least a portion of their portfolio in a vehicle that provides a fixed or guaranteed 5% return. If this type of vehicle were available today, it is likely some investors would be willing to sell some of their stocks to take advantage of it. This potential flow out of stocks to more conservative investments, which will likely happen when interest rates rise, could very well put downward pressure on stock prices.
The Federal Reserve is planning on raising interest rates very slowly so they do not shock the markets. They hope to do this as the economy continues to recover. We are hopeful and optimistic that the Federal Reserve will be able to cautiously raise rates over the coming years. Another possibility, and perhaps more likely, is that the economy does not recover as quickly as the Federal Reserve would like and they maintain their low interest rate policy for a prolonged period. A third possibility, and certainly a much less attractive scenario, is the economy remains sluggish and inflation rises. Rising inflation could force the fed to raise interest rates even if they are not happy with economic growth. Although this is in our opinion is an unlikely scenario it is a possibility. This would quite challenging for the stock market.
It is impossible to predict how the election or Federal Reserve policy is going to unfold and attempting to will likely cause fiscal and emotional stress. There are countless academic studies that show the negative consequence of trying to predict the market. Sticking to fundamental investment philosophy like diversification and investing based on your situation has never been more important.
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This commentary on this website reflects the personal opinions, viewpoints and analyses of the Financial Strategies Group, Inc employees providing such comments, and should not be regarded as a description of advisory services provided by Financial Strategies Group, Inc or performance returns of any Financial Strategies Group, Inc Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Strategies Group, Inc manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.