The 2016 Election Impact

The newspapers and TV have been full of commentary regarding the impact of the recent U.S. presidential election. Briefly:

1. Donald Trump won to the surprise of many (and to the dismay of pollsters).
2. Stocks went on a roller coaster prior to the outcome, but recovered and came up big as expectations of fewer regulations, the repeal of Obamacare, greater fiscal spending and lower taxes helped benefit certain sectors such as financials, healthcare, and infrastructure stocks.
3. Further, possible infrastructure investment and tax cuts reawakened the “bond vigilantes,” increasing interest rates. Fiscal spending could also mean greater government bond issuance, which would further decrease prices. The yield on the benchmark 10-year U.S. Treasury note now stands well over 2%.

Will these trends continue? For an answer, we refer back to our 3Q market commentary in which we quoted Yogi Berra: “It’s tough to make predictions, especially about the future.”

Predicting moves in the financial markets is not only difficult, but can often be misguided, especially when experts badly miss their mark. The eminent American economist Irving Fisher famously declared in 1929 that stocks had reached a “permanently high plateau,” yet within four years the Dow Jones Index had fallen more than 80%. Another eminent American economist, U.S. Federal Reserve Chairman Ben Bernanke, in May 2007, said that emerging problems in the sub-prime mortgage market were “likely to be contained.” Within two years, Bernanke’s Fed was forced to bail out much of Wall Street to avoid a second Great Depression.

So much of what is quoted in the news turns out to be noise which often translates to volatility. Catholic organizations should avoid market predictions, and the inevitable market timing efforts that they lead to, and instead focus on maintaining globally diversified portfolios and using sound rebalancing policies. This isn’t new, but over time, has proven to be sound investment advice.