Trump, the Markets, and the F-Word*

crystal ball in hand*that would be “fiduciary”

Over the last several weeks, professional financial planners like us have been fielding calls from clients who are asking the kinds of questions we dread hearing:

The Dow has reached (and then fallen back below; and then back above) 20,000.  Should I take money off the table?

or,

My preferred candidate didn’t win the election and I think the world is falling apart.  Don’t you think I should sell my stocks now before it’s too late?

The first question is the easier one to answer.  It seems to be human nature to have a strange fascination with round numbers. Why should Dow 20,000 be any different, from a pure investing standpoint, than Dow 19,774.83 or Dow 20,093.65?  The questions about this magic number become even sillier when you realize that the Dow Jones Industrial Average (aka, the Dow) is made up of just 30 out of many thousands of American-based companies. As the Dow continues to grow, it will hit new milestone numbers (Dow 25,000! Dow 30,000!) that will have equally little bearing on the specific construction of your portfolio as does Dow 20,000. Your portfolio should be built to achieve your goals (short- and long-term) independent of the periodic frothy peaks and frightening dips of the Dow.

As to the second question, the real issue is the eternal question “what’s coming next in the markets?”  The only truthful answer to that question, however it’s phrased, is: we don’t know.  This is a singularly unsatisfying response but no less true. To wit:

  • After President Obama was elected, we were fielding questions from angry and frightened conservative clients who were asking to sell their stock portfolios in anticipation of the country going to hell in a handbasket (their words, not mine!).  In retrospect, how did that work out? Those investors would have missed the longest running bull market (a bull market is one in which stock prices are rising) in memory.
  • Then, for the last five years, experts were certain that bond rates were going to rise dramatically and many investors bought ultra-short bonds (those maturing in less than one year) to avoid the losses they might incur when rates went up.  How did that work out? Interest rates stayed where they were for five more years and those investors missed out on percentage points of additional yield.
  • For the last four years, pundits have been saying that the current bull market is long in the tooth and a market correction was imminent. Over and over they prognosticated that it was a good time to cut back on stocks.  How did that work out? They would have bailed on this guess before the markets repeatedly broke record highs.

So now we have a situation where the other side of the political spectrum is still reeling from the presidential election results and predicting that the country is lurching toward disaster.  Advisors, including us, are doing everything they can to keep clients from acting emotionally rather than rationally during this transitional period.

The emotional decisions swing with the vagaries of the market and take limited consideration of the goals that the investments are trying to achieve. The rational decision would frame the question differently: given my goals and my time horizon, can I tolerate a dip in my assets (and that dip depends on how aggressive is your asset allocation) before the markets recover?  Will I have time to recover?  In a nutshell, what is the real impact of today’s political environment (and the resulting market movement) on you achieving your goals 10, 20 or even more years in the future?

One final observation on Trump and the markets is for me to set the record straight once and for all that we will have a bear market during the Trump administration. I haven’t hauled out my crystal ball for this ominous prediction but rather looked to history for a lesson on presidential cycles and market movements. The question shouldn’t be if there will be a bear market but rather when it will occur. Every presidential cycle has its share of market drawdowns, seemingly regardless of presidential policies.

You don’t believe it?  The accompanying chart shows the worst stock market drawdowns for every president since Herbert Hoover in the 1930s. You can see that good president or bad, Republican or Democrat, they all eventually experienced significant down markets.  Some might be surprised to see Ronald Reagan’s 25% and 33% drop from high to low, or the nearly 52% drawdown experienced during George W. Bush’s presidency.  Weren’t these pro-business Presidents?

Presidential Chart

What the chart doesn’t show is that after every single one of these scary drops, the markets recovered to post new highs like those we’re experiencing today.  So don’t listen to anybody who talks about “if” the markets are eventually going to go down sometime in the next four years.  We’re going to experience a bear market—time, date, duration and extent to be determined! When it does, keep calm and carry on because if history is any indication, we’ll see new highs again, eventually.

Regarding the “f-word,” you may hear about President Trump trying to roll back the Department of Labor’s efforts to impose a fiduciary standard (that means act in the client’s best interests) on advisors providing guidance about retirement accounts. You can get a refresh on the subject here from the blog we wrote on it last April. It’s sometimes dubbed the f-word in our profession because many commission-based advisors are opposed to being held to a fiduciary standard and have fought the implementation of the new regulations. We don’t know how this scenario will play out but we thought you might appreciate the reminder that at Inspired Financial, we always operate under a fiduciary standard of care and put our client’s best interests first. It made sense when I started the firm in 2003 and it still makes sense today.

We’re living in interesting times and we are grateful for those of you that have trusted us to guide you on this journey. You know to call us if you have questions or would like to discuss any of this further!

Evelyn Zohlen on Linkedin
Evelyn Zohlen
“My own life-changing transition inspired me to start Inspired Financial so that I could help other women and their families navigate their difficult life transitions and emerge confident, financially secure and empowered to deal with future life events.”

2 Comments

Pat Felbinger

Thanks Evelyn for clarifying the questions I’m sure many clients had. Always enjoy reading the newsletter–what’s new & info on the staff.
Honestly, I decided to email after reading your article so will now go back & read the remainder of the news/articles. Hope all is well!

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