How Will the Election Affect the Markets?
Financial markets exhibit a wide range of temperaments. They can be skittish and ready to bolt, calm and measured, or bewildered and lost. Markets rise and fall on waves of emotion, and take dramatic turns based on the news of the minute. After all, a market is the net product of millions of decisions made by people, or computers programmed by people, and by extension are subject to many of the same emotional characteristics that we all share as humans.
I am pretty sure that I am not alone on this, but I’m not comfortable with uncertainty. I am always more at ease when I have an idea of what’s ahead, and have a hard time relaxing if my environment is in a constant state of flux. I know my daughter is with me on this, Heather and I spend plenty of effort maintaining consistency in her world so that we can avoid the negative consequences of the alternative. Markets are very much the same way, and election years are emblematic of how near-term uncertainty can cause enormous amounts of volatility.
Every four years around this time, the topic of the election and its effect on the markets becomes a popular one for investors. The 2016 election cycle has been chock full of surprises and uncertainty. We have a deeply divided nation, two polarized political candidates, and only a few months left until Election Day. What DOES this mean for the markets? It’s a great question. How will the policies of the winning candidate shape the future? Will the market crash if it gets a result it doesn’t like?
The answer lies in the way markets process information. On one level, you have the constant stream of information that the financial markets are digesting. This includes a plethora of constantly changing data and the relentless stream of news and information. It also includes short-term uncertainty and events that will surely shape our future but have yet to do so, like the election of the next POTUS. I would also include the opinions of financial commentators and pundits in this category, and most all content coming from a financial media outlet like CNBC. Let’s call this the Noise.
The second level is slower to change. It’s not nearly as erratic , and is based on the underlying fundamentals of the economy. This is the information that is ultimately driving the direction of the markets. Let’s call this the Signal.
An election year, especially like the one we are experiencing this year, brings with it a high amount of uncertainty, volatility, and noise. As we continue to move closer to election day and beyond, there will be fewer and fewer unknowns and the noise will begin to settle…. until the next noise-making event. In the interim, the Signal will continue to move methodically and change slowly based on the underlying fundamentals and strength of the economy at large.
So should we make investment decisions based on who will end up in the oval office and which policies they may enact? Often these types of decisions can be emotionally driven, and are guided heavily by the Noise. My advice is that investors refrain from making decisions under these conditions. By filtering out the Noise and focusing more on the Signal, we make fewer mistakes, progress more rapidly towards our financial goals, and do so with far less anxiety along the way.