For those of us who live in Cleveland, the Republican National Convention (RNC) this week is yet another exciting event for our city. For two+ years Cleveland has been hurriedly preparing for this coming week. New hotels, new freeways, a new public square, endless rerouting of traffic etc., etc. The only hiccup so far has been that the center of the action is the “Q“ arena, home of the Cleveland Cavaliers basketball team. Instead of being able to transform the arena into a convention hall as planned, the arena pretty much had to stay intact until the playoffs were over and the victory parade was done (not that anyone minded!). Those tasked with the Q’s transformation have been furiously working day and night since the parade three weeks ago to get everything ready.
As the convention starts, the intensity of the presidential election season will increase from an already heightened level. It is likely the rhetoric and vitriol will intensify as well (if that is even possible at this point). I have met few people who are staunch supporters of either party’s presumptive candidate. Many people I speak to say they intend to cast their vote to block the candidate they like least rather than being an enthusiastic supporter of the person for whom they are casting their vote.
Regardless, the uncertainty of the election season will likely play on the markets in the next few months. I suspect there will be the usual reports on statistics about how markets react in presidential years leading up to the election, after the election, the year following an election, etc. I view this as a lot of noise. There is also likely to be a fair amount of fear-mongering by each party about what will happen to the economy should the opponent get elected. Those accusations have the potential to weigh heavier on market sentiment than any statistics about market behavior in prior elections. For this election season in particular fear-mongering may be more unsettling than normal to markets. This is because the unknowns about the potential presidency for each candidate seem to be greater than other elections in recent memory. On the one hand, Hillary Clinton has been pulled to the left by the wing of her party supporting Bernie Sanders. On the other hand, Donald Trump has not provided much in the way of detail and he has not been able to unify his party. This creates uncertainty about the policies either candidate would truly support once they become President. Each party will have a platform developed at their respective conventions. Often those platforms are given short shrift by the media. This go around, however, may be different. The party platform may prove to be where the party battles are fought vigorously and where we as citizens and investors may get some clarity about what initiatives and policies each party/candidate will truly pursue over the next four years.
Looking beyond the presidential race to the results of House and Senate races will likely have more impact on the direction the country and the economy. Right now both the House and Senate are in Republican hands while the Presidency is Democratic. The expectation is that the House would remain Republican given the large majority they currently maintain. However, in the Senate, the Republicans have many more Senate seats up for election than the Democrats. Many of those Senate races remain in a dead heat. How different combinations of Democratic or Republican leadership for President, Senate and House may impact policy is an analysis for another day. Suffice it to say as long as there is a 2:1 split it seems gridlock would prevail. As Barron’s July 4th cover story put it: “Regardless of who takes the White House next January Congress will be there to provide a muted welcome. “
We think the underpinnings of the U.S. economy, while not robust, remain solid. And, after several years of difficult times, many foreign economies appear to be showing signs of life. That said, the lack of clarity and uncertainty the election is creating, combined with a heightened level of fear-mongering (not only by the candidates, but by Super PAC’s, etc.) may make the road up to the November election a bumpy one for the markets. Investors may have to look to the less traditional signals such as the party platforms and House and Senate races to gain the clarity usually revealed by the election of the President.
Many clients have inquired about how the elections might impact their portfolios, if their asset allocation is appropriate, and should any changes be made. Asset allocations outlined in client investment policy statements are long term strategies and we do not see reason to alter those allocations. We think the choppiness that might occur between now and November could result in many investors trading in an attempt to time markets. This would create a lot of trades and a lot of noise, but not much change in the fundamentals of most companies. At the margin there may be some tactical opportunities, but staying the course of the asset allocation designed for the portfolio will be the key to the long term investment success clients seek.
As Clevelanders, we are excited to host the RNC. Security issues abound, but Cleveland had a “trial by fire” when 1.3 million people descended on the parade for the Cavs, which pretty much went without a hitch. We are hopeful that the 50,000+ visitors who descend on our city will treat it with respect. Perhaps the activities at the RNC will mimic the current weather forecast. At the time of this writing the weather report is for sunny skies early on with the rest of the week forecasted for thunderstorms. But just like this election cycle, the weather forecast in Cleveland does not inspire confidence heading into it!
All comments and questions are welcome.
Denise Farkas, CFA®