Considering what November’s choice between President Donald Trump and former Vice President Joe Biden might mean to investors, wealth manager Rick Adkins recounted a story involving Arkansas’ favorite son or favorite villain or both, Bill Clinton.
In 1992, when people started to sense that Clinton would send George Bush packing from the White House, one of Adkins’ major investment clients panicked.
“He just knew in his mind the market was going to crash if Bill Clinton, a Democrat, got elected,” said Adkins, president and CEO of Arkansas Financial Group Inc., the Little Rock investment advisory firm. “During the eight years Clinton was president, the market had one of its biggest runs. But in this client’s case, he kept knowing the market was going to drop, so he sat there and watched the market go up without him.”
The story’s moral? “I think the danger is when people put their politics above their pocketbook,” Adkins said.
Wealth managers and national experts agree that clients’ long-term goals, rather than political winds, should drive investment decisions. They note that any one president’s power to shape market prices pales against the force of external events, the overall thrust of the economy and the Federal Reserve.
Still, advisers say prudent strategists might well consider how a Biden victory or four more years of Trump might play out in narrower ways — in the energy sector or banking, for example.
“Finance decisions should be built around achieving goals, and that’s the predominant focus I’d always have,” said Larry Root of Larry Root & Associates, a private wealth advisory practice in Little Rock and a franchisee of Ameriprise Financial Services Inc. “The influence of presidential politics on the markets is always overestimated. But there are considerations surrounding politics, policies and tax law. There are things that come into play when we have some real stark differences in the two parties and two individuals running for president.”
“One is the area of energy,” Root continued, “where one side is focused on current fossil fuel methodologies and the other oriented toward driving the economic engine in a way that leaves a lot of the fossil fuel industries behind, or certainly transformed.”
The Trump administration favors coal production, oil exploration in previously off-limits areas and hydraulic fracturing, a controversial method for tapping hard-to-reach oil and natural gas. The White House has routinely eased environmental restraints on industries, and the president has been a vocal skeptic of man-made climate change.
A Biden presidency would likely mean a wholesale reconsideration of fuel sources, stricter carbon controls and possible incentives to the renewable energy industry.
A recent Kiplinger list of stocks to buy if Trump wins, on the other hand, included ExxonMobil, Twitter, Facebook and the VanEck Vectors Russia ETF.
“I think it’s really important to have a balanced portfolio right now and not overloaded in specific sectors,” Root said. “There will certainly be winners and losers in the election, and if you’re weighted in one sector, whether it’s health care, financials or energy, there’s a risk. There’s also the uncertainty over who’ll control Congress. If we have split power, the markets will look at that more favorably, anticipating small changes rather than big changes.”
The most obvious potential winner in a Biden victory would be “a big green wave,” Root said, with “new technology for energy production and energy transfer versus the fossil fuel industries that have been in place for over 100 years.” That’s just one example, Root said, “but it’s important to keep in mind who’s running things, and what their characteristics are, and what exposure investors and clients might have in those various markets.”
‘Never Bet the Farm’
One key is diversification, both Root and Adkins said. “If you think you’re right, you might be,” Root said. “But if you know you’re right, you’re probably not. We never bet the farm on anything, no matter how certain it looks. We always maintain a diversified position. It’s a simple idea, but as true today as the day I started, when the Dow was below 900.”
Behavior finance specialist Meir Statman, a professor at Santa Clara University in California and author of “Finance for Normal People,” recalled the fears that gripped some investors during the Barack Obama administration. Back then, some investors and wealth managers feared that the market would crash whenever Obama spoke, and Statman related that unease to today’s fears. “The world seems to be coming to an end, but it won’t.”
Adkins said that people can make emotional decisions defying reality, and they fixate on how a presidential change might cost them. “The first reaction in general should be not to do anything radically different today than you would have four years ago or four years from now. It’s foolhardy.”
It seems logical that the stark difference between Trump and Biden might move markets in energy and other sectors, but Adkins said outside forces can easily overwhelm any presidential policy in rocking stock prices. One example, he said, is the petroleum price war between Russia and Saudi Arabia, which began in February and eventually crashed the futures market.
Getting Back to Goals
Never simply assume that stocks will decline under a Democratic president or rise under a Republican, Adkins said. History shows otherwise. Since 1929, the S&P 500’s calendar-year returns have been positive 37 years with a Democrat in the White House and 30 years with a Republican in office, according to Bloomberg and Standard & Poors data collated by Ameriprise.
“When you put the effect of a presidential election, and kind of get cute with it in how it fits into the last 30 years, or in the next 30 years, it’s just a pimple on an elephant’s butt,” Adkins said. “But people get terribly carried away by emotion.”
David I. Kass, a clinical finance professor at the University of Maryland’s Robert H. Smith School of Business, told Arkansas Business in an email that investors should keep a 10-year time horizon on stocks and stay relatively unconcerned with adjusting for partisan politics. “If there is a Democrat sweep (White House and Congress), then long-term capital gains taxes are likely to go up in 2021,” Kass said. “Then, investors with long-term capital gains may wish to realize some of those gains in 2020 at the current tax rate. It is likely that the economy will continue to grow in the years ahead regardless of the 2020 election results.”
All Democratic candidates are not necessarily equal before the markets either, Adkins said. “It’s all politics, but let’s just say that if Bernie Sanders were the nominee, I’d be way more focused on the areas in which he might be able to affect things. In the case of Biden, a more moderate nominee, that’s probably less of an issue.”
And Adkins said a change in presidential administration is indeed a good time for wealth managers and their clients to get back to basic goals, like keeping a 60-40 portfolio split between stocks and bonds. “When you’re getting up to 70 or 73% stocks, you no longer have that 60-40 split,” Adkins said.
While Root and Adkins stressed that orderly markets require stability, Statman said that wealth managers and their clients too often ignore anything other than stock prices.
“As to chaos and regulations,” he said, “this does not require action on the part of investors now, other than voting.”