“So should I cash out of the stock market?”
This is the question I’ve heard from several liberal-leaning friends in the last few months. I get a few emails in this vein every time the stock market hits new highs.
They are worried that the combination of high share prices and an erratic president mean that the only direction for stocks is down. They are considering shifting some of their assets into cash or bonds.
The short and safe answer to give them is: “I don’t know.” But there’s also a long answer.
Letting one’s political opinions shape investing decisions is a good way to lose money. Whether a given chunk of your savings should be in stocks, bonds or cash depends on your appetite for risk and when you’re going to need that money.
It shouldn’t be shaped by whether you love or hate the current occupant of the White House.
We all have a tendency to fall for motivated reasoning. If you think President Donald Trump and his policies are bad, there’s a natural tendency to think that will soon be reflected in share prices. That could turn out to be true.
But politics makes us stupid. It can cause us to overweight the risks and perils we want to see, and underweight the possibility that, at least in terms of markets, things could go quite well.
First, much of the movement in stocks has little to do with what the president of the US does. It would be silly to credit Bill Clinton with the dot-com boom that took place during his presidency, or to blame George W. Bush for the collapse of it.
But even when the action out of Washington is driving markets, it is easy to be blinded by your political opinions. The response to the financial crisis by the Obama administration and the Federal Reserve in early 2009 succeeded at ending the recession and setting the US economy on an expansion that continues to this day.
Conservatives tended to malign the stock market rally every step of the way. But those who put their money where their mouth was — that is, into cash instead of stocks — lost out on a 182 per cent gain in the Standard & Poor’s 500 during the Obama presidency.
Liberals are just as susceptible to this motivated reasoning. Barry Ritholtz of research firm FusionIQ recalls hearing left-leaning friends in the hedge fund industry confidently assert in 2003 that the Bush tax cuts would be bad for markets by blowing out the budget deficit and failing to create jobs. Instead, the stock market rose steadily from that point until late 2007.
There’s certainly no guarantee that the stock market will continue to rise under the Trump administration. There are ways that the outlook for investors could get better, and also plenty of ways for them to get worse.
It’s very likely there will be corporate tax cuts and deregulation, both of which benefit companies’ bottom-lines in a pretty direct and measurable way. It was optimism about those policy priorities that has driven the market rally since Election Day. Throw in some extra government spending on the military and public infrastructure, and you have a recipe for speedier growth.
Maybe the pragmatic, pro-business figures in the Trump administration will prevail in internal battles, meaning that, whatever you think of the broader policy agenda, there could be boom times for corporate bottom-lines.
There are, of course, darker possibilities.
Trump could spark a trade war that could turn into a global recession. Military conflict could break out with a major trading partner like China or disrupt oil supplies in the Middle East. And a small crisis could spiral into something bigger because of Trump’s seat-of-the-pants management style.
Whatever probability you assign to positive and negative outcomes, it’s hard to dispute that the range of possibilities for what the global economy looks like four years from now is uncommonly large. All else being equal, more variation in the economic future means that stocks are riskier.
It’s also true that by many measures stock valuations are high. Investing $100 in the S&P 500 buys only about $4.69 in annual earnings, down from $5.06 before the election.
There is always the possibility of a major correction — something that would be true no matter who was in the Oval Office.
If that scares you, your money probably shouldn’t be in the stock market. If you are planning to tap into those investments in the next few years and a 25 per cent drop would be devastating, that’s all the more reason to limit your exposure to the market.
Stocks tend to offer good long-term returns, but can deliver low or negative returns for many years at a time.
Moving money out of stocks because you need it within the next few years and can’t stomach that kind of risk is one thing. But making a move just because you lack confidence in Trump could be a case of letting ideology trump investing discipline.
— New York Times News Service
