Download It`s Probably a Bad Idea to Sell Stocks Because You Fear Trump

It’s Probably a Bad Idea to Sell Stocks Because You
Fear Trump
New York Times
By NEIL IRWIN
FEBRUARY. 13, 2017
Much of the movement in stocks has little to do with what the president does.
“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, as it
did on Friday.
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 Trump and
his policies are bad, there’s a natural tendency to think that this 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
United States 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 in 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
United States 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 percent gain in the Standard & Poor’s 500 during the Obama presidency.
Liberals are just as susceptible to this motivated reasoning. Barry Ritholtz of Ritholtz
Wealth Management 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 is 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.
President 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 could
disrupt oil supplies in the Middle East. And a small crisis could spiral into something
bigger because of Mr. 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 will look like in four years 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 percent 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 President Trump could be a case of letting ideology trump investing
discipline.