The recent re-emergence of market volatility has stoked some fears. Specifically in the investors who take their politics a little too seriously.
Financial markets moving around is nothing new, but some investors, without a coherent investment philosophy, are quite happy to replace it with an incoherent politico-investment philosophy. Whatever happens in financial markets can be directly attributed to their political side or their political opponent.
This position makes investing incredibly difficult. Every time a government changes, it means their portfolio’s structure is up for consideration. The long term only exists if their team is in charge. If the other team is in charge, well, there may not be a future to look forward to!
There’s a not too surprising divergence right now in the US. The reaction to the recent market correction has split down political lines. Recently, both the New York Times and Wall Street Journal ran articles on investor reactions to the tariffs, the White House incident with President Zelenskyy, and the subsequent market sell off.
The Democrat voters had seen enough. It was the beginning of the end; they wanted to protect their money and were selling out. Move to cash and bonds. Risk off. The Republican voters and Trump supporters thought it was the complete opposite. This was just a regular market movement we see every year, nothing out of the ordinary. Keep buying stocks. Risk on.
It’s a very familiar story and something we highlighted in June last year, albeit with a role reversal, when Joe Biden was President. 67% of Republicans thought the US was in a recession, 80% of them believed inflation wasn’t easing, and 49% of Americans also thought the S&P 500 was negative for the year. At that point in time, it was actually up 15%. It wouldn’t be a stretch to assume most of that 49% were Republicans and Trump supporters. Now people drawn from that same pool of voters are relaxed about a market correction!
The people profiled in the recent New York Times and Wall Street Journal articles were as follows:
Yoram Ariely, retired with no noted affiliation, hadn’t changed anything in years, but last week sold half his stocks, fearful of all the changes.
Patton Price, who voted for Kamala Harris, liquidated his retirement accounts the day Trump was inaugurated.
Jasmine Singh, no noted affiliation, started selling US stocks and buying European stocks after the contentious White House meeting with Volodymyr Zelensky.
Francisco Ayala, a financial adviser, gave the example of two clients. One, who couldn’t stand Trump, was asking about investing outside the US. Another, who adores Trump, suggested this was just the way markets work.
Ben Pfeiffer, a Trump voter, started buying various stocks as they dropped. He thought the left or liberal side of politics had a bleak view, and it was making them vulnerable to bad decisions.
Lars Staack, a retired 62-year-old former Republican voter, but a democrat since 2016. A long-term investor in stockmarket index funds, he started selling out in January, switching much of the money into bonds, he now only held 30% in stocks.
Siegfried Lodwig, no noted affiliation, 80 and retired, had half his retirement savings in stocks, which was managed by an investment firm. He wasn’t planning to make any changes, suggesting the market always bounces back.
Praisely McNamara, who voted for Kamala Harris, withdrew half, which was the maximum amount allowable, of her 401.k (retirement savings) in February, despite having to pay thousands in tax penalties!
Alison Greenlaw (a friend of Ms. McNamara), no noted affiliation, liquidated her diversified target date retirement fund, to put it in a money market fund in late February. She suggested the uncertainty in the US was “existential”.
Stephen Dinan, a Democrat voter, moved his children’s education funds from US stocks to international stocks and bonds, while he switched, he and his wife’s retirement savings into bonds.
In several of these cases, it’s investors decades away from retirement making decisions that are being influenced by their political leanings and what they’ve seen on the news. The commonly accepted wisdom of doing nothing, no longer applies they say. They all believe we’re in uncharted territory. We’d say the future is no more uncertain that it’s every been. It’s the future, you can’t see it, so it’s always uncertain!
In the cases of Siegfried Lodwig and Lars Staack, Mr Lodwig is an advised investor who sounds reasonably relaxed, with half his portfolio in stocks. Probably around what it should be for his age of 80. On the other hand, Mr Staack appears to be DIYing and is not relaxed. He now has only 30% of his portfolio in stocks, and at 62, is considering lowering that even further.
Which is another notable point here. The advised person is already in the right portfolio and is not doing anything. Most of the non-advised people are reacting. Specifically on Mr Staack, it appears he entered retirement very aggressively, with his portfolio 100% in stocks. He has shifted from that extreme to an underweight position of 30% in stocks, and has a view to lowering that allocation even further. Without any guidance he’ll probably continue to fiddle with his portfolio until he feels things are “certain”. That might be when a Democrat is back in the White House!
As Mr Staack admitted in the article, “I’m fumbling about, trying to figure out what is going to be the best way to preserve my retirement savings.”
We could say there’s a better way, but sometimes political leanings are too much to overcome.
Take the case of Michael J. Boskin, a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He chaired the Council of Economic Advisers under President George H.W. Bush. Boskin was out early in Barack Obama’s first term as president proclaiming that the performance of the stockmarket in the first 7 weeks of his presidency was evidence sinister stuff was afoot.
It’s hard not to see the continued sell-off on Wall Street and the growing fear on Main Street as a product, at least in part, of the realization that the new U.S. president’s policies are designed to radically re-engineer the market-based U.S. economy.
Boskin’s editorial in the Wall Street Journal asserting Obama’s policies were further crashing the US stockmarket was published on March 9, 2009. That’s a notable date many investors have committed to memory. It was the date the stockmarket bottomed in the US during the global financial crisis!
The S&P 500 was up over 15% per annum over Barrack Obama’s Presidency.
Finally, if anyone might have an opinion about what’s going on in the US, it’s the US Federal Reserve who met this week. From Bloomberg:
For weeks the US economic picture has been darkening. If Wednesday was an opportunity for Federal Reserve Chair Jerome Powell to raise the alarm, he took a hard pass.
Speaking to reporters following a two-day meeting of policymakers, Powell downplayed mounting growth concerns and the price hits that could be on the way from President Donald Trump’s aggressive trade war. He even revived a once-abandoned term to say the inflationary impact of tariffs is likely to be transitory.
Doesn’t sound like a concern.
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.