How to talk about the 2020 US election with your clients

The US presidential election will be on many people’s minds as the rhetoric heats up and the news media doubles down before the vote in November. Some investors may be tempted to wait on the sidelines until all the votes are counted, while others may feel compelled to buy and sell based on the daily campaign coverage. However, it is well-established that making portfolio decisions based on politics yields dicey results, at best. That’s why financial advisors need to talk to their clients about the potential election outcomes and the issues that really matter to their portfolios. Here’s what I’ll be focused on during the upcoming election hypercycle as I separate what’s useful information to consider from the market perspective.

I’ll start by saying that party preferences are not the issue here. Whether you or your clients lean left, right or center, it’s important to understand each candidate’s economic platform. Some proposals could be more impactful than others, and I need to be able to discuss possible market outcomes with a wide range of colleagues, policymakers, and investors. I can’t do that if I get pulled into the quagmire of left versus right, but that doesn’t mean pretending the election isn’t happening. Instead, I focus not on parties but on what situations the markets might react to and what investors and financial advisors need to know to make the best decisions possible.

That being said, perhaps the most important advice I can offer is to be aware of bias, both your own and your clients’ (after all, as human beings, we all have them in some shape or form.) Campaigns are designed to provoke emotions — and emotions can encourage us to make irrational decisions. Understanding what messages cause a strong emotional reaction can help investors avoid making rash decisions based on those feelings.

That’s not only true on a personal level, but on a global level, as well. While during an election cycle it can feel like every headline is screaming for attention, I always ask myself: which developments have the potential to actually move markets, and what’s just more noise?

To decide, I pay close attention to the difference between long-term and short-term impacts. As we’ve seen with the recent spate of early primary voting, political fortunes come and go, and not everything that grabs headlines moves markets. When evaluating the true impact of a political story, I’m careful to remember that in the long run, economic trends, not politics, usually drive markets.

In this light, innovation is an especially powerful force. That means that issues that may seem unrelated to markets can actually have a huge impact. I ask questions such as: What are a candidate’s proposals on supporting innovation? What is their track record on working with industries in transition? It’s often more useful to look at how a candidate thinks about the future of energy, for example, than how they did in the most recent caucus, since there will be many, many contests before November.

To give another example, trade policy is quite relevant to global markets. Just think of how the US-China trade war affected the global economy and global markets: the uncertainty depressed capital spending and caused bouts of market volatility. Thus far, we haven’t heard too much from campaigning politicians about trade policy. But as the election cycle begins in earnest, I’ll be looking for more details on trade-related issues, including:

• US-China trade negotiations: How do the candidates view this important relationship and the results of the negotiations so far?
• Brexit: As the European Union and UK work out the details of their relationship, what might that mean for their respective economies and markets?
• The Trans-Pacific Partnership: Which Democratic candidates support rejoining the Trans-Pacific Partnership, from which President Trump withdrew? What other trade deals might be called into question based on who takes office in January of 2021?

International trade isn’t the sexiest campaign talking point, but issues like these can impact the global economy and roil markets. Even if it’s not an issue garnering a lot of headlines, most candidates will still take a stand on major trade agreements in their platforms.

Finally, the question forefront in my mind during an election cycle is usually: What does the Federal Reserve say? The Fed exerts a powerful force on the US economy and beyond by setting interest rates and maintaining the stability of the financial system, among other priorities. While candidates on both sides of the aisle may have ideas on how to positively impact the US economy – and indirectly the stock market – it is what the Fed does that usually matters more.

Luckily for us, most experts believe that the Fed will not be drawn into any election-year drama. According to a survey by Bloomberg, most economists polled believe that “Federal Reserve officials won’t allow the 2020 presidential election to sway their monetary policy decisions and will keep interest rates on hold for the next two years.” If all else fails, this should calm any fears of major foreseeable economic upsets.

There’s no avoiding this election cycle, so we may as well prepare for it. That’s why I advise focusing on the principles outlined above: understanding one’s own biases, looking at which developments could have lasting impacts (such as trade policy), and bearing in mind the stabilizing impact that the Fed can have. I try as much as possible to take the emphasis off the frenzied news cycle and put it where it belongs: on long-term economic and policy trends that will ultimately determine our financial futures. After all, financial benchmarks such as the Dow industrials hardly paint a clear picture of the impact of presidential elections on markets, which are more obviously roiled by earth-shaking events—the Great Depression, World War II, the Great Recession—rather than who was inaugurated.1

When discussing the election this year, remember: It’s the human reactions to news that often impact investors’ portfolios more than the news itself. By skipping the election hype, and encouraging clients to do the same, we can make better financial decisions. Many of these good decisions will be based on tried-and-true strategies that can be easy to forget during a hectic news cycle and thus are worth reiterating to clients: don’t sell out of fear, strive for diversification, and embrace long-term thinking. This is all part of a virtuous cycle of proportionate response that can help safeguard each one of us from unnecessary volatility. 

1 Source: Chuck Jaffe, “What Stock-Market Investors Should Know About Presidential Cycles,” Wall Street Journal, Nov. 3, 2019

Important Information

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Brexit refers to the scheduled exit of the UK from the European Union.

The Dow Jones Industrial Average is a price-weighted index of the 30 largest, most widely held stocks traded on the New York Stock Exchange.

Diversification does not guarantee a profit or eliminate the risk of loss.

NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEED

All investing involves risk, including the risk of loss.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.

The opinions referenced above are those of the author as of March 3, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

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