Tune Out the Noise of Hot-Button Campaign Issues
If you live in a big city like New York, Los Angeles or Chicago, you know very well the constant hum that permeates daily life. Some live for all the noise, it’s exciting; for others, peace and quiet is all they desire.
In the investment markets, I’d contend investors fare better in the peace and quiet. Noise combines with volatility and leads to attention. More often than not, the mere fact that something happened has investors making changes.
Invariably, they zig when they should be zagging.
In our experience, it’s usually best to do nothing during periods of market noise. Any reasonably constructed investment plan should fully anticipate that at some time, for some reason, the markets will become volatile. Although we seldom can anticipate the precise circumstances that will drive the noise, we know it’s out there.
If your portfolio is properly constructed, you shouldn’t have to respond.
But let’s face it. We’re emotional creatures so, while we’re in the midst of a volatile market, the temptation to do “something” is pretty powerful.
Sitting here today, we can confidently predict that a not-so-random period of noise is at hand. National elections, especially when the Presidency is at stake, have become prime noise-making events.
Over the next few weeks, try to remember that campaign promises and sensational advertising are meant to garner votes. Campaigns spend vast sums of money researching you to know what will invoke a sense of confidence (from the incumbent) and fear (from the challenger). Messages are crafted to create noise that instills a sense of urgency.
As you listen to all of it, keep in mind there is no evidence that one party’s victory ensures a good or bad market.
However, you should pay attention to the policies promised by each party. Policies do influence the direction of the market over time. Fortunately, passing sweeping policy changes is not all that easy.
Here are a couple things to be aware of amongst the noise:
Biden Promises Cap Gains Tax Increase
This very well could be the loudest issue for investors. Candidate Biden is out with a proposal to lift the capital gains tax.
This clearly has to be bad for stocks, right?
According to an analysis of previous capital gain hikes, economist Tim Dowd and Robert McClelland says that there was, indeed, a wave of selling in two previous instances whereby capital gains taxes increased.
According to CNBC, sales of stocks and other assets increased by 60% in 1986 as the capital gains tax was poised to jump from 20% to 28%, but that downward pressure was short lived. Stocks continued to go in 1986 up even after taking into account the selling from those wishing to lock in the lower capital gains tax rate.
Clearly there are many factors to consider when making a sell decision; taxes are just one of those factors. Whether higher capital gains rates have a permanent impact on capital formation (investment) also depends on a whole host of other factors.
The National Debt/Stimulus Spending
The pandemic has resulted in a flood of fiscal stimulus from Washington. All of that spending is increasing the nation’s debt. As the election draws near, look for the rhetoric to increase.
We see some of that with the second pandemic stimulus package being negotiated in Washington. Democrats are holding out for a bigger package. Republicans say enough is enough.
Currently the market would like to see some sort of package passed. There is a strong sense that without this government spending, the impact of the pandemic on the private sector will be prolonged. We agree.
But fiscal conservatives argue that level of national debt is approaching dangerous amounts. Too much debt and we risk the long-term vibrancy of our economy. This is true. However, that is not a problem that we’ll face anytime soon. More important now is to ensure a rapid economic recovery post-COVID 19.
When it comes to national politics you will hear much noise in coming days and weeks. My best advice is for you to ignore it, especially in terms of making any investment decisions.
I would be more than happy to discuss how any of these issues may or may not impact your specific situation. Please give me a call to schedule an appointment.