Download Do Presidential Elections Impact the Market?

INVESTMENT FOCUS
How will the Presidential
Election Affect Your
Investment Portfolio?
HISTORY SAYS, NOT MUCH AT ALL
Do presidential elections impact the market? Yes. But the data prove that, as the Bloomberg
View puts it, “investors like election years, no matter who wins.”1 Since 1964, The S&P 500
Index gained 11 times, with winners beating losers 5.5 to 1.2 Only two election years, both
of which witnessed extreme economic downturns, saw negative returns: the dot com bust of
2000 and 2008, the beginning of the worst recession in recent history.
ANNUAL PERCENTAGE CHANGE IN S&P 500 INDEX, ELECTION YEARS 1964 TO 2012
30.0%
20.0%
25.8%
15.6%
13.0%
20.3%
19.1%
12.4%
7.7%
10.0%
4.5%
1.4%
0.0%
13.4%
9.0%
-10.0%
-10.1%
-20.0%
-30.0%
-40.0%
-50.0%
-38.5%
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
Percentages as of December 31 for each year
Source: Standard & Poors
It’s also important to note that, for the 39 years during this same period in which there were
no presidential elections, the S&P went up 27 times and down only 12 times.3 No doubt this
underscores that successful investing requires a long-term point of view.
Winkler, Matthew A. “Investors Like Election Years, No Matter Who Wins.” Bloomberg View. August 1, 2016.
Ibid.
3
Ibid.
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WHY CAN’T INVESTORS SIT BACK AND ENJOY THE RIDE?
Because, often, partisan emotions get the better of them. Prognosticating “name” investors,
economists, researchers and so-called investment gurus in the media who are focused on
keeping and growing an audience all feed this very human attribute. In every election cycle
you’ll find pundits “advising” investors to beware the effect on the market of various party
platforms, or to focus on these sectors if Candidate A wins, and on those sectors if Candidate B
wins, based on party pledges. Just Google the subject and you’ll see. But once a candidate takes
office, campaign talk and party platforms don’t always match reality.
To further sway emotional decisions, you’ll find other pundits say that, after the election,
market performance will be influenced by such things as whether the incoming President will
have both a Senate and House controlled by his (or her) party, swings in the federal deficit, or
the President’s rising or falling approval ratings. Empirical evidence for such theories is
basically nonexistent.
Emotions often run high in presidential campaigns. Certainly, 2016 is no exception. Nor
will be the next four to eight years of the new President’s term in office. Experienced advisors
recognize that investment decisions based on emotions are the real problem. Regardless who
is elected, the country will be nearly evenly divided on the outcome. Research shows that both
groups are likely to adjust their portfolios to some degree based on November 8’s results.
According to Time Magazine, “that’s when things really get risky.” 4
BIPARTISAN EXAMPLES ABOUND
The danger of “confirmation bias” is very real. Many people, not just investors, are guilty of
seeking out and interpreting information that confirms their preexisting beliefs or opinions, while
giving much less consideration to alternative thinking. A lot of investment opportunities have
been lost due to this type of “selective memory.” Some readers may remember these
headline-making opines:
●
A renowned economic adviser to Bill Clinton insisted that President George W. Bush’s 2003
tax cuts would be near-disastrous for new-economy companies.5 Investors who turned a deaf
ear doubled their money in tech stocks across the next four years.
●
In early 2009, a highly regarded Stanford professor of economics and former Chairman of
George H.W. Bush’s Council of Economic Advisers argued that President Obama’s policies
were “killing the Dow.”6 He is not quoted, however, explaining the Dow’s rise of more than
11,000 points in the last eight years.
WHAT SHOULD INVESTORS DO?
Remember that, for most of us, investing is — and should be — a long-term endeavor. Don’t
become guilty of obsessing on the possible outcomes of the next few years, regardless of who
wins. Instead, apply a goal-oriented, disciplined investment methodology and hold to the
long-term view that the market does indeed go up and down across time.
Tepper, Taylor. “How the Election Will Really Affect Your Investments.” Time.com/Money. June 22, 2016.
Stiglitz, Joseph E. “Bush’s tax Plan—The Dangers.” The New York review of Books. March 13, 2003.
3
Boskin, Michael J. “Obama’s Radicalism Is Killing the Dow.” The Wall Street Journal. March 6, 2009.
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Contact FlexShares
at 1-855-FlexETF
(1-855-353-9383) or
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you have questions on
real assets or to learn
more about any of the
FlexShares family of ETFs.
Some specific examples of ways to ride the potential turbulence of the new President’s term:
Don’t forget the basics: depending on your goals, time horizon and risk tolerance, make sure
you do your homework on any changes or additions to your portfolio based on your parameters
and not those in the news.
Wait and see: consider Warren Buffett’s advice about being “fearful when others are greedy
and greedy when others are fearful.” You may want to hold off on major portfolio decisions until
the election dust settles. If you see investors rushing away from certain sectors (or the market
as a whole) based on their own “confirmation bias,” be ready to consider capitalizing on a
potential downturn.
Play defense: The current bull market celebrated its seventh birthday this past March and,
if it continues till next April 2017, it will be the longest lasting in history.7 It can’t last forever.
If you feel a correction is coming soon, look for sectors that are not dependent on a flourishing
economy, such as healthcare. Or, you may want to assess adding an emphasis on dividend-paying
stocks. For instance, you may want to consider an ETF like the FlexShares Quality Dividend
Index Fund suite (ticker symbols: QDF, QDYN, QDEF), which is designed to vet dividend stocks
via a sophisticated multifactor analysis to potentially deliver only quality-rated companies.
FLEXSHARES CAN HELP
ETFs have a unique ability to provide broad coverage of major indexes, industry sectors or asset
classes at very low cost. Beyond low expense ratios, they also offer a high level of liquidity and
tax efficiency. We encourage all investors to consider ETFs as part of their core holdings in a
diversified portfolio strategy. If you would like to learn more about Exchange Traded Funds in
general or the many funds available to you in the FlexShares family of ETFs, please don’t
hesitate to call us at 855-FlexETF (855-353-9383), or visit www.flexshares.com.
IMPORTANT INFORMATION
Before investing, carefully consider the FlexShares investment objectives, risks, charges and
expenses. This and other information is in the prospectus, a copy of which may be obtained by
visiting www.flexshares.com. Read the prospectus carefully before you invest. FlexShares ETFs
are distributed by Foreside Fund Services, LLC, not affiliated with Northern Trust.
An investment in FlexShares is subject to investment risk, including the possible loss of
principal amount invested. Funds’ returns may not match the returns of their respective Indexes.
The Funds may invest in emerging and foreign markets, derivatives and concentrated sectors.
In addition, the Funds may be subject to asset class risk, small-cap stock risk, value-investing
risk, non-diversification risk, fluctuation of yield, income risk, interest rate/maturity risk, currency
risk, passive investment risk, inflation-protected security risk, market risk and manager risk.
For a complete description of risks associated with each Fund, please refer to the prospectus.
FlexShares Quality Dividend Index Fund (QDF), FlexShares Quality Dividend Defensive
Index Fund (QDEF) and the FlexShares Quality Dividend Dynamic Index Fund (QDYN) are
passively managed and use a representative sampling strategy to track their underlying index.
Use of a representative sampling strategy creates tracking risk where the Fund’s performance
could vary substantially from the performance of the underlying index. Additionally, the
Funds are at increased dividend risk, as the issuers of the underlying stock might not declare
a dividend, or the dividend rate may not remain at current levels. The Funds are also is at
increased risk of industry concentration, where it may be more than 25% invested in the assets
of a single industry. Finally, the Funds may also be subject to increased volatility risk, where
volatility may not equal the target of the underlying index.
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