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Thoughts Regarding Our Domestic Equity Markets

Sigma Investment Counselors

October 21, 2016

Despite a panoply of investor concerns, domestic equity markets continue their march higher.  Many of these concerns focus on the uncertainty of the post election world.  Not only are investors keeping a close watch on which candidate is elected as our next president, equally important is whether there is a change in control within the Senate and/or House of Representatives.

There seems to be a perception by some investors that as we wake up Wednesday morning on November 9th, we will be living in a new reality that will immediately introduce great uncertainty and turmoil to the capital markets and geo-political landscape.  We don’t share these concerns.

Depending upon who is elected and which party controls the House and/or Senate, the market will immediately try to handicap how this new leadership may impact our economy, fiscal and monetary policy, etc.  We also acknowledge that there may be an initial “electoral” shock that hits the market, much like we saw with the “Brexit” vote.  Yet, the reality is that people’s behaviors and business activity does not turn on a dime. The economy will be no different on November 9th than it was on November 8th.

Capital markets do not like uncertainty.  Oftentimes, it is the fear of the unknown that causes anxiety and market weakness.  On November 9th, investors can begin to focus their attention on how to move forward with our new administration while making adjustments along the way.  This is far more constructive than the paralysis that seems to be in place today.

The new administration may wish to introduce new policies quickly after taking office.  These programs may have far reaching implications to all of us.  Yet, history has shown us that the introduction of these programs takes a long time to be implemented, allowing investors and businesses alike to adapt to a changing landscape.  One does not need to look further than the Affordable Care Act, passed in early 2009 (right after President Obama and the Congress came into office), which took years to design and implement.

Thus, our recommendation is that investors focus on the economy.  Our view is that our economy will remain in a slow growth and low interest rate environment in the near term (next 12-18 months) regardless of who is in office.  A slow growth environment with solid fundamental underpinnings, combined with low interest rates, could prove to be a positive catalyst for the equity markets.  So, while we are prepared for a rocky ride over the next several weeks, we believe any material weakness will be short-lived and we will attempt to take advantage of such move.  After-all, we expect the economy to look pretty much the same on November 9th as it did on the day before.

All comments and questions are welcome.

Denise Farkas, CFA®

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