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Buy? Sell? Politics May Move the Market, but Rarely for Long Buy? Sell? Politics May Move the Market, but Rarely for Long
(about 4 hours later)
The United States stock market shuddered last week on a report that President Trump had tried to stop an F.B.I. investigation of his former national security adviser, with the Dow Jones industrials falling 373 points in one day and drawing comparisons to the Watergate-era bear market.The United States stock market shuddered last week on a report that President Trump had tried to stop an F.B.I. investigation of his former national security adviser, with the Dow Jones industrials falling 373 points in one day and drawing comparisons to the Watergate-era bear market.
If you think politics is roiling United States markets, consider Brazil: The day after the Trump-induced turmoil on United States exchanges, the Brazilian market fell 10 percent and trading had to be halted after news of a bribery scandal engulfed its relatively new president, Michel Temer.If you think politics is roiling United States markets, consider Brazil: The day after the Trump-induced turmoil on United States exchanges, the Brazilian market fell 10 percent and trading had to be halted after news of a bribery scandal engulfed its relatively new president, Michel Temer.
In France, investors were relieved that the centrist Emmanuel Macron decisively defeated the far-right National Front leader, Marine Le Pen. An upset Le Pen victory would very likely have made the market reaction to Britain’s decision to leave the European Union last summer look tame. The so-called Brexit vote sent European stocks down 7 percent the day after the surprise outcome.In France, investors were relieved that the centrist Emmanuel Macron decisively defeated the far-right National Front leader, Marine Le Pen. An upset Le Pen victory would very likely have made the market reaction to Britain’s decision to leave the European Union last summer look tame. The so-called Brexit vote sent European stocks down 7 percent the day after the surprise outcome.
In a period of otherwise extended market calm, geopolitics have been driving periodic bouts of volatility. Even small investors have been making bets on the impact politics can have on stocks and other asset classes. After last week’s sell-off, I got a wave of questions from people asking whether Mr. Trump might be impeached and if they should sell stocks.In a period of otherwise extended market calm, geopolitics have been driving periodic bouts of volatility. Even small investors have been making bets on the impact politics can have on stocks and other asset classes. After last week’s sell-off, I got a wave of questions from people asking whether Mr. Trump might be impeached and if they should sell stocks.
I obviously can’t answer the first question. As for selling stocks, my answer, as it has been consistently since the election, is “no,” at least not because of the troubles swirling around the president.I obviously can’t answer the first question. As for selling stocks, my answer, as it has been consistently since the election, is “no,” at least not because of the troubles swirling around the president.
Consider what has happened in the days since the headline-making news. By the middle of this week, the Standard & Poor’s 500-stock index had recovered virtually everything it lost after the Trump-Russia news broke, and was within a few points of a record close. Consider what has happened in the days since the headline-making news. By the middle of this week, the Standard & Poor’s 500-stock index had recovered virtually everything it lost after the Trump-Russia news broke, and on Thursday it closed at a new high.
Brazil’s Bovespa index regained much of the ground it lost last week and was in positive territory for the year to date.Brazil’s Bovespa index regained much of the ground it lost last week and was in positive territory for the year to date.
Within a month of Brexit, European stocks had recovered nearly all their losses. This year European stock markets have been notching new highs.Within a month of Brexit, European stocks had recovered nearly all their losses. This year European stock markets have been notching new highs.
Even some of Wall Street’s most famous and successful investors have been struggling this year to turn political upheaval into market gains. Paulson & Company and Soros Fund Management, two of the best-known global macro hedge funds, which make bets on geopolitical events, lost billions last year according to an annual hedge fund ranking compiled by LCH Investments. Paul Tudor Jones’s Tudor Investment, another macro fund, was flat, and Mr. Jones recently told investors he’s taking on more risk and shifting to more quantitative strategies in an effort to enhance performance.Even some of Wall Street’s most famous and successful investors have been struggling this year to turn political upheaval into market gains. Paulson & Company and Soros Fund Management, two of the best-known global macro hedge funds, which make bets on geopolitical events, lost billions last year according to an annual hedge fund ranking compiled by LCH Investments. Paul Tudor Jones’s Tudor Investment, another macro fund, was flat, and Mr. Jones recently told investors he’s taking on more risk and shifting to more quantitative strategies in an effort to enhance performance.
A macro hedge fund index compiled by Hedge Fund Research is down nearly 1 percent since Jan. 1 and over 4 percent for the last 12 months, one of the worst performing hedge fund indexes. Meanwhile, the S.&P. 500 gained almost 10 percent in 2016 and is up more than 7 percent this year.A macro hedge fund index compiled by Hedge Fund Research is down nearly 1 percent since Jan. 1 and over 4 percent for the last 12 months, one of the worst performing hedge fund indexes. Meanwhile, the S.&P. 500 gained almost 10 percent in 2016 and is up more than 7 percent this year.
By and large, “investors should tune out political events,” said James B. Stack, president of InvesTech Research and Stack Financial Management, who has done a study of what he calls “crisis events” and their effect on markets. “Historically speaking, and as a seasoned investor, I’d say investors should just ignore geopolitical events like Brexit or whatever is happening in Brazil.”By and large, “investors should tune out political events,” said James B. Stack, president of InvesTech Research and Stack Financial Management, who has done a study of what he calls “crisis events” and their effect on markets. “Historically speaking, and as a seasoned investor, I’d say investors should just ignore geopolitical events like Brexit or whatever is happening in Brazil.”
The problem, Mr. Stack’s research has found, is that “geopolitical events may be widely feared, and there will often be a knee-jerk market reaction when they’re unexpected, but seldom do they have a lasting impact. Underlying economic trends and monetary policy are far more important.”The problem, Mr. Stack’s research has found, is that “geopolitical events may be widely feared, and there will often be a knee-jerk market reaction when they’re unexpected, but seldom do they have a lasting impact. Underlying economic trends and monetary policy are far more important.”
Markus Schomer, chief economist at the asset manager PineBridge Investments, made a similar point. As fundamental investors with longer time horizons, “we try not to be distracted by the political noise,” he said. “I’ve been telling even our traders with shorter time horizons that what we’re seeing doesn’t really affect the economy or monetary policy, which is more important for markets than anything else.”Markus Schomer, chief economist at the asset manager PineBridge Investments, made a similar point. As fundamental investors with longer time horizons, “we try not to be distracted by the political noise,” he said. “I’ve been telling even our traders with shorter time horizons that what we’re seeing doesn’t really affect the economy or monetary policy, which is more important for markets than anything else.”
Mr. Stack noted that stocks declined sharply after the terrorist attacks of Sept. 11, 2001. But the bear market and recession that followed the technology bubble that exploded in 2000 were already well underway by then. September 2001 turned out to be an unusually bad time to sell stocks: By New Year’s Day 2002, little more than three months after the post-9/11 low reached on Sept. 21, the S.&P. 500 had gained close to 20 percent.Mr. Stack noted that stocks declined sharply after the terrorist attacks of Sept. 11, 2001. But the bear market and recession that followed the technology bubble that exploded in 2000 were already well underway by then. September 2001 turned out to be an unusually bad time to sell stocks: By New Year’s Day 2002, little more than three months after the post-9/11 low reached on Sept. 21, the S.&P. 500 had gained close to 20 percent.
A more recent example was the showdown over the federal debt ceiling in 2011, when Standard & Poor’s downgraded United States government securities for the first time amid fears the government might default on its debt. “Stocks dropped 15 percent in less than two months and we were on the brink of a bear market,” Mr. Stack said. “Once the crisis was resolved, stocks came roaring back,” and had regained all their losses by year-end.A more recent example was the showdown over the federal debt ceiling in 2011, when Standard & Poor’s downgraded United States government securities for the first time amid fears the government might default on its debt. “Stocks dropped 15 percent in less than two months and we were on the brink of a bear market,” Mr. Stack said. “Once the crisis was resolved, stocks came roaring back,” and had regained all their losses by year-end.
Of 11 major geopolitical events examined by Mr. Stack’s firm, only two — the Nazi invasion of France in May 1940, and Japan’s bombing of Pearl Harbor in December 1941 — led to market losses over one-week, three-month and one-year periods (and in the case of Pearl Harbor, the one-year decline was less than 1 percent).Of 11 major geopolitical events examined by Mr. Stack’s firm, only two — the Nazi invasion of France in May 1940, and Japan’s bombing of Pearl Harbor in December 1941 — led to market losses over one-week, three-month and one-year periods (and in the case of Pearl Harbor, the one-year decline was less than 1 percent).
President John F. Kennedy’s assassination had no discernible impact: Stocks were up more than 20 percent a year later.President John F. Kennedy’s assassination had no discernible impact: Stocks were up more than 20 percent a year later.
As geopolitical crises go, those were pretty big shocks to markets and investor psychology. So far, nothing in the Trump administration has come close. Still, expectations that Mr. Trump and a Republican Congress would succeed in enacting business- and shareholder-friendly tax and regulatory changes are part of what has driven recent market gains.As geopolitical crises go, those were pretty big shocks to markets and investor psychology. So far, nothing in the Trump administration has come close. Still, expectations that Mr. Trump and a Republican Congress would succeed in enacting business- and shareholder-friendly tax and regulatory changes are part of what has driven recent market gains.
Mr. Stack noted that measures of confidence among small businesses, chief executives and consumers are at or near record levels. “There’s no doubt that expectations have accelerated since the election,” he said. “So the question is whether political turmoil will turn those expectations upside down,” leading to a loss of confidence and lower consumer spending. That could happen, but so far, “we’re not seeing any evidence of that,” he said.Mr. Stack noted that measures of confidence among small businesses, chief executives and consumers are at or near record levels. “There’s no doubt that expectations have accelerated since the election,” he said. “So the question is whether political turmoil will turn those expectations upside down,” leading to a loss of confidence and lower consumer spending. That could happen, but so far, “we’re not seeing any evidence of that,” he said.
He said comparisons to the Watergate-era bear market of 1973-74 were off base, because then the country was in recession, the Arab oil crisis sent gasoline prices surging, inflation was raging and interest rates hit record highs. Arguably, President Richard M. Nixon’s abandonment of the gold standard and the transition to market-determined currency exchange rates had more to do with plunging stock prices than his crumbling presidency.He said comparisons to the Watergate-era bear market of 1973-74 were off base, because then the country was in recession, the Arab oil crisis sent gasoline prices surging, inflation was raging and interest rates hit record highs. Arguably, President Richard M. Nixon’s abandonment of the gold standard and the transition to market-determined currency exchange rates had more to do with plunging stock prices than his crumbling presidency.
Mr. Schomer said a failure to act upon many of Mr. Trump’s spending and tax proposals might not be such a bad thing for markets, given that the United States economy is already at or close to full employment and doesn’t need additional stimulus. “At the end of the day, the only reason we’ll have a recession is if the Fed is forced to raise interest rates too quickly, unless we have a massive crisis, which I don’t see happening,” he said.Mr. Schomer said a failure to act upon many of Mr. Trump’s spending and tax proposals might not be such a bad thing for markets, given that the United States economy is already at or close to full employment and doesn’t need additional stimulus. “At the end of the day, the only reason we’ll have a recession is if the Fed is forced to raise interest rates too quickly, unless we have a massive crisis, which I don’t see happening,” he said.
If anything, history suggests that long-term investors should buy stocks after markets fall on bad geopolitical news, not sell. But that’s not to say this time won’t prove to be an exception, or that markets won’t correct for other reasons.If anything, history suggests that long-term investors should buy stocks after markets fall on bad geopolitical news, not sell. But that’s not to say this time won’t prove to be an exception, or that markets won’t correct for other reasons.
Whatever happens with President Trump, the United States is in the ninth year of the second-longest bull market since World War II; none have made it past 10 years. Valuations are getting stretched. Sooner or later, there will be another correction, and eventually a bear market.Whatever happens with President Trump, the United States is in the ninth year of the second-longest bull market since World War II; none have made it past 10 years. Valuations are getting stretched. Sooner or later, there will be another correction, and eventually a bear market.
Nonetheless, Mr. Schomer says he sees no imminent end to the bull market. “We’re not going to see a 25 percent surge this year, but this economic cycle is so slow and steady with so few imbalances, we could end up with 8 to 10 percent gains the next few years and a much greater degree of overvaluation.”Nonetheless, Mr. Schomer says he sees no imminent end to the bull market. “We’re not going to see a 25 percent surge this year, but this economic cycle is so slow and steady with so few imbalances, we could end up with 8 to 10 percent gains the next few years and a much greater degree of overvaluation.”
For his part, Mr. Stack said: “We still believe this market will hit new highs in 2017, but the low volatility and the high valuations suggest this is not a low-risk market. It’s not a market in which you should be investing large sums of new capital.”For his part, Mr. Stack said: “We still believe this market will hit new highs in 2017, but the low volatility and the high valuations suggest this is not a low-risk market. It’s not a market in which you should be investing large sums of new capital.”