Third Quarter Market Update

With the 2016 general election drawing closer, many investors are wondering how the stock market will respond to abundant political uncertainty. As Donald Trump and Hillary Clinton fight it out, emotions are running high and there is a growing uneasiness in regards to the markets. Those who have money invested in the stock market are particularly nervous, as the unparalleled nature of this year’s election leaves them wondering what is in store for the markets.

Politics and Our Economy

First we must all come to grips that in January 2017 either Donald Trump or Hillary Clinton will be our President. For those who are less than pleased with our presidential options (and there are many of us), there’s no “do-over.” While this can be disheartening and discouraging, know that America and her economy are large, diverse, and dynamic.

The events that will impact the markets this next year will not solely be influenced by the comings and goings in Washington D.C.. Furthermore, we’ve seen worse than either of these two candidates and have still managed to survive. The sun will rise the day after the inauguration and the nation will go about its business. However, in both the run-up to the election and its immediate aftermath, there is the potential for the market to be affected by the results. What might this look like?

Pre-Election Market Expectations

Probability tells us that investors are currently pricing in a Clinton victory. It is also likely that the markets could become more volatile if investors begin to doubt this consensus, as investors hate uncertainty. Donald Trump is well known to the business world, but a President Trump is a significant unknown. We know little about his future economic policies, and what he has said so far has been vague and contradictory.

Despite what opinions you may have heard about Hillary Clinton, she does have a long history in government. The business community has a basic understanding of the possible economic policies of a Clinton Administration. None of this is to say that the markets are in love with the idea of Clinton as President. Instead, it is simply a case of the “devil you know being better than the devil you don’t.”

After the performances we witnessed in both Presidential debates, the odds still favor Mrs. Clinton as President, with a likely outcome of a divided Republican Congress. But this is all just conjecture. If the consensus regarding the election results changes, markets could become increasingly volatile, at least until the results of the election are final.

Post-Election Economic Possibilities

There have been many speculations about this election ushering in a market crash or a bear market. While it is impossible to accurately predict what will occur, it’s important to understand that markets can experience a downturn at any time. Market volatility has a historical average somewhere between 10 and 15% during the course of the year. This year is no exception to this rule, as we’ve already seen stock prices decline around 11%. Historical volatility and the declines it produces are part of the ticket you punch when you own equities. But what about the possibility of more significant declines?

Market Crash

As we’ve seen in the past, market crashes occur when an unexpected event finds investors “off sides” in their risk exposure. Basically, something unexpected occurs, causing investors to become sellers all at once, overwhelming regular purchasers of stock who naturally pull back in the face of such an onslaught. We saw this after 9/11. In the immediate aftermath of that event, investors sold shares without regard to price.

Right now, the most likely situation investors think could cause this particular issue would be Mr. Trump winning the election. But investors have had months to contemplate this outcome and plan ahead. A Trump win may cause a decline in stocks but is less probable to lead to what might be defined as a classic market crash. Just like with the Brexit vote this summer, it is possible that markets could stage a rather quick recovery once it becomes evident that the world won't end with the results of the vote, even though the results were not what polls predicted. Stocks actually staged their best rally of the year on the heels of that UK election.

Bear Market

A bear market is usually different than a market crash, although a crash can morph into a bear market.  Bear markets occur when stocks are significantly overvalued or when the economy begins to contract. While stock valuations are currently elevated, markets by many measures  are not  as overvalued as they were in the early 2000s.  Also, economic activity is not showing signs of recession as most recent economic statistics currently point to a continuation of the muddle-through economy we’ve seen over the past few years.  Classical bear markets take time to form and don’t resolve themselves overnight. There will likely be a chance to reevaluate portfolios if one of these is starting.

Your Best Strategy

Understandably, investors hate volatility, especially volatility that leads to portfolio declines. But instability can be tough to plan for when it comes to your portfolio. As we have previously stated, we know of no strategy short of 100% cash that can completely protect your portfolio from market changes. While there are methods to hedge a portfolio, these can be expensive and will often produce losses that the average investor is not willing to accept. The best way to deal with inevitable market uncertainty is to create a disciplined investment plan and reevaluate your strategy as market forces dictate.

If you are feeling nervous about the impact the upcoming election will have on your portfolio, or if you think your portfolio is not set up to stand firm against market trends, please contact us at 708.488.0115 or by email at lumencapital@hotmail.com. We would love to discuss your situation and analyze how your finances will hold up in times of economic uneasiness.

About Chris

Christopher R. English is a money manager and the founder of Lumen Capital Management, LLC, a Registered Investment Advisory firm. Specializing in investment management and developing customized portfolios that reflect a client’s values and needs, he has nearly three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 708.488.0115 or emailing lumencapital@hotmail.com.