The Financial Markets in an Election Year
The time has come once again where questions from investors turn towards the upcoming election and what the market will do if (fill in the blank) wins. The conversations go something like this, “I will tell you, if that guy wins (pick your poison…R or D) I am going to go to cash because…blah, blah, and blah.” Yes, the human tendency is for each person to become his or her own self proclaimed Nostradamus of the 21st century. And there seems to be no shortage of support from the media outlets, brokerage houses, banks, and economics departments to continue to fuel the fire for those who want to become Soothsayers.
So, is this truly the concern the investor has about the markets or is it something much deeper? In other words, is this the same type of investor behavior that has been looking for a reason to go to cash as each case before, as an example: Financial Crisis, Great Recession, Greece, Housing Crisis, Greece again, Treasury downgrade, Greece again, Spain, High Unemployment, Rising U.S. Debt, Slowing GDP growth, Italy, and Greece once again. I’m sure I missed a few, but I figured this is enough pain to rehash all the issues that we have faced in the past five years. Yet, after all these concerns the S & P 500 has gone from a peak of around 1,565 on October 9, 2007 to a low of 676 on March 9, 2009 and is now sitting at roughly 1,437 in September 2012.
How should we interpret these figures, not as politicians would, but to give us a true assessment of your financial portfolio over said time frame? Obviously, each individual is different based on his or her personal situation, but the media’s focus seems to be directed towards the equity markets as a gauge for your happiness (at that point in your day…minute by minute). Let’s assume you’ve invested 100 percent in the S & P 500 and if you took all your money and placed it into the market, what would have happened based on the following hypothetical scenarios;
- You bought at the peak of the market (the worst case scenario) - Return is negative 8.18 percent or $100 is worth $91.82.
- You bought at the bottom of the market (the best case scenario) - Return is positive 112.57 percent or $100 is worth $212.57.
- You sold at the peak of the market and went to cash and are still waiting for the above crises to end – Return is most likely very good…
- You sold at the bottom of the market and went to cash and still waiting for the above crises to end – Return is negative 56.81 percent or $100 is worth $43.19.
So, which one most closely represents your investor behavior? Is this just another event viewed as an opportunity or one to make another behavioral mishap? You see, my view is that freedom of choice and entrepreneurialism has and most likely will find a way in the long run - as history has shown. It may not always make the correct short-term choice but in the long run it adapts, adjusts, and reinvents itself for the benefit of the large majority because the larger majority (the free market place) chooses the best price, product, or solution to improve its standard of living.
Oh yeah, back to the Presidential Election…I’m fairly certain those same concerns were discussed for the elections of Bush, Clinton, Bush, Reagan, Carter, Ford, Nixon, Johnson, Kennedy, Eisenhower, Truman, and Roosevelt, to name a few, from the end of WWII to the present. And by the way, the S & P 500 had peaked around 19 in the year 1946 (You do the numbers for the returns and the number of crises since that year).
Past performance is no guarantee of future results.
This article was written by Lou Melone, Managing Partner, with Budd, Melone & Company in Auburn Hills, MI. Lou Melone can be reached at 248.499.8704.
Posted date on Dbusiness.com- Article XVI, Issue II
The S&P 500 Index: The S&P 500 index consists of 500 stocks chosen for market size, liquidity, and industry group representation. Investors cannot directly purchase an index. It is a market value weighted index with each stock’s weight in the index proportionate to its market value.
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