Should We Expect a Political Correction?

Oct 19, 2016Intentional Ownership

It seems like everyone wants to know what’s going to happen to the stock market at the conclusion of the upcoming presidential election. Will the results plummet us into a recession? Or will they propel us into an expansion? The only thing we know for sure is that no one knows what is going to happen. Any predictions you hear are purely speculations. There is no crystal ball that can show us the future of the stock market, so we won’t know the outcome until it happens.

However, it is important for us to take a realistic perspective of the stock market. When we understand how the market works, we can prepare ourselves for what is to come. With that in mind, let’s focus on these two important points: (1) The stock market is comprised of businesses, and (2) the market does not like uncertainty.

(1) The stock market is comprised of businesses.

Keep in mind: we own businesses, not governments. Buying stock is the equivalent of owning part of the company itself. The true, intrinsic value of that stock comes from the business’ ability to grow and make profits. However, the market value of a stock fluctuates based upon supply and demand. If the demand for a particular stock rises, its market price will also rise (and vice versa). And many times the demand for stocks fluctuates based on what is happening outside of the companies themselves, including government regulations. Therefore, the intrinsic value of a stock may not equal the market value of a stock.

First Trust’s Chief Economist Brian Westbury uses this illustration: Imagine you are playing a baseball game, and the umpires told you that the rules will be changed in the seventh inning. In the seventh inning, home runs will either be worth half of a run or two runs. Knowing this, you would probably play the first six innings just like any other game. But in the seventh inning, your game plan would change. If home runs are only worth half of a run, you’d probably try to make it around the bases by hitting singles, doubles, and triples. But if home runs were worth two runs, you’d be swinging for the fences. In the same way, good businesses often understand how to change their plans to work around the madness of government regulations.

Inevitably, we will soon have a new president. It may be Donald Trump. It may be Hillary Clinton. Regardless, we can be hopeful that businesses will, as they have in the past, be able to adapt and thrive within the economic environment created by these candidates.

(2) The stock market does not like uncertainty.

As seen in the past, the market becomes volatile in the midst of uncertainty. Take the Brexit for example. When Britain announced that it was going to leave the European Union, the market reacted, and the DOW dropped nearly 900 points (CNN 06/27/2016). But within a matter of days, the market regained those losses. Why did this happen? Uncertainty. No one knew what the implications of the Brexit would be, and many short sighted investors panicked. The demand for stocks dropped. Once investors realized that there was not an immediate threat to their business or profits, demand for stocks went back up.

With this election, we are down to two choices: Donald Trump and Hillary Clinton. If Clinton is elected, the market will most likely be less volatile, because the market thinks it knows what to expect from a Clinton presidency. If Trump is elected, we will most likely see more volatility, as investors feel less certainty around the policies of a Trump presidency. We do not believe that this is anything worth worrying over, especially in light of a long term investment plan. We expect businesses to be able to adapt to either a Trump or Clinton presidency and continue to thrive.

In conclusion, do not let yourself be inundated with fear. Wisdom tells us that we should never make decisions out of fear but from careful rationale and logic. In this case, it is important for us to prepare ourselves by understanding the possible outcomes. With preparation, we will be less likely to make unwise, and often detrimental, fear-based decisions.