Transcript

Wiser Financial Advisor – What Could Happen with Markets After Midterms

Hi, Everyone. Welcome to the Wiser Financial Advisor with Josh Nelson, where we get real, we get honest, and we get clear about the financial world and your money.        

This is Josh Nelson, Certified Financial Planner and founder and CEO of Keystone Financial Services. Let the financial fun begin!

This time of year is beautiful in Colorado. Leaves are changing, so we are enjoying it. But this year is an interim election year and so it’s hard to avoid all the political talk. And one of the questions we’re getting asked the most right now from clients is around politics. People are asking: “What do you think is going to happen to the market after the election?” So of course the honest answer is, “We don’t know.” Nobody knows what the election outcome is going to be or what the market’s going to do because of that. We’ve seen lots of pollsters being really wrong over the last few election cycles with some things turning out very different from what they expected.

A couple of different points I wanted to bring up to you today because a lot of you are wondering, “What does Keystone think about this? What does Josh think about the election and what’s going to happen?”

So far this year, if you’ve been following your account statements in the stock market and so forth, it has been one heck of a year. And in fact I had a client ask me the other day whether we’ve had a worse year than this in the past. And I had to think about that. When we think about the years past, when the market went down as it did in the pandemic year of 2020, the market dropped almost 30% at one point in the spring. Then it bounced back pretty quickly when the policy changes started going through and trillions of dollars got injected into the economy. There was a pretty good end of the year to 2020, so it didn’t really look all that bad.

Here in mid-October 2022, things aren’t looking real good, but who knows, a lot could change between now and the end of the year. So I think a lot of people are especially sensitive to this because they’re hoping that there’s going to be some miracle comeback toward the end of the year, and that maybe politics could either thwart that or help out, depending on the outcome of the elections.

I don’t want to minimize elections or the consequences of elections and some of the policy changes that could go through. It’s important that we all vote and stay informed to a certain extent because we’re all participating in this and it’s important that we are guiding the process even though we may not like the outcome of elections sometimes.

I think this stuff is really interesting, though I know a lot of people do not think it’s interesting. I was a political science undergrad and I still find politics to be very interesting. Now, does it have an impact on people’s investments? Yes and no. Sometimes it does, sometimes it doesn’t. But just as an aside, I can tell you that it’s a personal interest of mine to keep track of what’s going on both with the right and the left. I actually like to hear all the policy changes and debates on both sides of the issues. I stay fairly informed on this stuff, but sometimes we do need to be the gatekeepers of our own minds, especially during times like this when if you’re listening to the radio, TV, social media, or anything like that, it seems every other ad you see or hear has something to with politics. They all say, vote for this person, if this person wins, if this person loses, it’s the end of the world.

We’re old enough to remember a lot of election cycles, enough to know that the world does not end because of an election. We may not like an outcome, but utopia is not going to happen and neither is the end of the world. So don’t let the media trick you into thinking that there’s more importance than there actually is. We do have a situation going forward. Almost certainly we’re going to see gridlock going forward and we’ll talk about that here in a bit. But sometimes the market likes that. Sometimes gridlock can take some uncertainty out of financial decisions for individuals and business leaders or political leaders. It can also thwart some things as well. Sometimes that’s good, sometimes it’s bad, but it is important to be thinking about it and keeping things in perspective.

For those of you who have been in my office before, you might note that I have a chart that shows lots of data points over the last 100 years. And when people see that chart for the first time, it makes their head explode because not only does it show the stock market but the bond market; it shows inflation and interest rates and all kinds of stuff. One of the data points is a little bar that shows red and blue over the 100 years. It shows who was President and who was in control of the House, and who was in control of the Senate. It’s interesting to get perspective, because sometimes we get too focused on what’s happening right now. So one observation in looking at the chart is that there’s a lot of red and there’s a lot of blue and they trade back and forth over time.

I know that might be oversimplifying things, but by looking at historical events, we gain perspective. During all the good things and bad things that have happened over the last 100 years, we had lots of Republicans and lots of Democrats that were president and in control of Congress. We had different governorships all across the country, and with all that’s happened, we survived it regardless of who was in power.

America tends to like gridlock. I think we know that there’s a balanced situation likely to go forward. More than likely we’re going to see a Republican House if the pollsters are right, and very close in the Senate. In other words, either flat Republican or slight Democrat. And of course we’ve got a Democrat in the White House for another two years. So when you look at the political situation going forward, more than likely we are going to see gridlock.

Some people get frustrated about that message, thinking that means we’re going to continue to see the situation where nothing happens. No big policy changes to fix stuff. The reality is, the stock market kind of likes gridlock. I know that seems weird, but the stock market likes taking politics out of the equation when it comes to what’s going to happen next. Stock market does not like uncertainty, as you may have observed looking at your account statements. During various time periods when there are years like 2020 when the pandemic hit or back during the financial crisis of 2007, 2008, 2009 or the dot-com crash of 2000. In 2001, we had the accounting scandals and 9/11. Black Monday was back in 1987. We can point to lots of things over the years that have been negative and have caused the market to react negatively, not because of what happened necessarily, but also because of the uncertainty that it created.

My guess is that the market might like some certainty going forward, knowing that there aren’t likely to be big policy changes as a result of an election outcome. I think about half of our clients are Democrats and about half are Republicans. We do not ask that, by the way, and we don’t sit and debate politics. I don’t tell people my political opinions simply because it doesn’t matter when it comes to their financial planning. Money really is something that is neither Republican nor Democrat, right? It’s not to minimize policy changes and changes in the tax code, but the reality is there are certain rules of money. There are rules and guidelines and values that need to be adhered to if you want to be successful financially. Over time, that transcends politics.

Let’s return to the question that we’re getting right now: “What do you think the market’s going to do after the election?” So, knowing that gridlock is likely to be an outcome, my guess is the market at least will be OK with that. Might even like it. Maybe we’ll actually see a rally after the election. But one thing to keep in mind is that the market is so many different things. It’s the stock market, the bond market, the cryptocurrency market, the real estate market. There are lots of markets and parts of the economy that will react in different ways.

Sometimes after an election, especially if it’s hard left or hard right, you will find some market volatility that hits. This is because sometimes Republicans can be more favorable toward certain industries and the same is true on the side of Democrats. You might find sectors that do better under Democrats or Republicans. But the gridlock situation probably means that we’re going to see the status quo going forward. We’re probably not going to see any big policy changes. I think business owners, business leaders, and individuals will kind of like that.

Of course if you have particular issues or things that you think should be addressed and they’re not being addressed because we’ve got gridlock again, that can be frustrating. That could happen on the right or the left. The flip side is that nothing crazy is going to happen. You’re not going to see major policy changes from the opposite party.

So, the honest answer is, “We don’t know the election outcome, and we do not know what the markets are going to do as a result.” Looking at past elections, midterm election cycles tend to swing the other way from whoever won the last time around. Like a pendulum, it can go the other direction and we usually end up with some gridlock historically.

One thing to keep in mind is that regardless of the election outcome and whether you like it or don’t like it, either way, businesses will adapt. Business owners will adapt, individuals will adapt. We’re all going to figure stuff out and move on. Business owners, business leaders are smart. They’re going to adapt to either a gridlock situation or a hard left or hard right. If they don’t adapt, they’re not going to make it. You’re not going to be very successful as a business owner if you don’t have adaptability. We talk about IQ. That’s the intelligence quotient, but EQ is even more important. Actually, it isn’t the strongest who survive; it’s the most adaptable. As businesses, we do need to be able to adapt over time. And of course, we can see a littering of businesses that once were great but don’t even exist anymore or maybe they’re just a shadow of what they once were—because they did not adapt quickly enough to changing.

Regardless of what party is in control, businesses and individuals are going to take a look at the new reality, whatever it is. Even if policies end up getting passed that are completely unfavorable to their business. Yeah, they may squawk. Let’s say that there are tax increases that get passed or tax cuts that get passed. Or maybe there were tax cuts, but it didn’t help. But at the end of the day, we’re going to pay our taxes. We’re going to play by the rules. We’re going to do what we have to do for ourselves, for our families, for our businesses, for the people depending on us. We are going to make a change and adapt to those conditions and move on.

Conditions change. Business conditions change, economic conditions change, political conditions change, so it’s very important that we’re cognizant of that and adapting quickly enough to be successful regardless of what ends up happening. We don’t know, right? It’s about 50/50 right now, and maybe it’ll be 50/50 going forward. Who knows? And finally, what matters in the end, is that we adapt to conditions as business leaders, as team leaders, as individuals, as people watching our own finances and making our own financial decisions. We are going to be able to adapt to that over time and make good choices for ourselves.

One thing I wanted to leave you with as well is that this has been an interesting year. Again, that question we are getting about whether we’ve had a year that’s been this bad before. We have. Certainly, there have been other bad times, and sometimes those times turn around quickly. But sometimes economic conditions can be bad for a long time, for multiple years. In the 1970s, it was a decade of bad returns. In the 2000s, we had a lot of up and down action. We had a really bad start to the decade and then we saw some rally in the mid part of the decade and then a really bad end to the decade with the financial crime. There have been some really tough times in the past and also related good times.

One thing that I always want to remind myself, is that no matter how bad things are, if you’re in a bear market, if you’re in a recession, if the economic conditions that you find yourself in are not what you like, in the past there’s never been a recession that wasn’t followed by an expansion. They just don’t last forever. Same thing with bear markets. We’ve never had a bear market in the history of the stock market that wasn’t followed by a bull market, so don’t give up faith.

The other thing to keep in mind is that good times don’t last forever either, but if you look at history in the chart in my office over the last 100 years, you can see that that chart tends to trend up. Even if there are some extended periods of bad times, there are always good times following that, and the good times tend to be bigger and to last longer, sometimes over decades.

So, good times don’t last forever. Bad times don’t last forever. As a trend over time, business owners, business leaders, people that invent stuff and adapt, will do well. That’s our history right here at Keystone Financial Services. We came out of Bill Hewlett and Dave Packard, who did the Hewlett Packard environment. Many of our clients worked at HP or one of its other companies that spun off over the years. Bill and Dave started HP back in the 1930s. They started in Dave’s garage during the Great Depression. They ended up being very successful. Disney company was another company from the Great Depression. Often, sad times can create some creativity. It can destroy a lot of things too, so this is not to minimize the impact on certain businesses or individuals when you hit tough times. Sometimes it makes you stronger.

For those of you who are discouraged looking at statements or looking at your account online, just note that bad times don’t last forever. To have a long term perspective as an investor, use the people who came before you, the really successful investors like Warren Buffett who tends to be a buy-and-hold investor. Many of his companies he’s held for decades. That’s his perspective is now, looking at what’s happening day-to-day. He’s looking at buying good businesses, buying good investments, holding on to them for the long run and not making any knee jerk reactions. So I throw that out to you just as a discussion point. If you’ve got friends or family or coworkers that are kind of distressed right now and not knowing what to do, we would love to visit with them. There’s no obligation. We’re not going to put a high pressure sales pitch on them or something like that. But this year, we’ve actually grown more as far as new clients, new assets coming in than we ever have in the history of Keystone. So kind of interesting, right? The market stinks. The economy stinks and we’re growing faster than we ever have. I think that’s not only because of people like you introducing your friends because you love the experience you’re getting with us. I hope that’s the reason you want to pass it on to somebody else. But also, the fact that times like this can be a bit scary and create uncertainty in people’s minds. They might get fearful because they’re wondering, am I still going to be OK? Whether they’re still working or retired we want to be putting them in a situation where they’ve got a plan. That may not be guaranteed, but they’ve got a plan. They’ve crunched some numbers and really looked out. They’ve asked: “What does this mean to me over a period of time?” And we’ve put some things into place to make sure they’re able to sleep at night.

We love introductions. We love to grow by referral. We don’t do a whole lot of marketing. We don’t do a whole lot of advertising. The way we grow is just people like you, so thank you for your business. Certainly thank you for the faith that you’ve put in myself and my team. During times of uncertainty like this is really when we earn our money. So don’t give up hope. Over time, investors that invest for long periods and stay diversified tend to do pretty darn well. No guarantees, but certainly we want to be here to support you and your families.

Take care, have a great week. God bless.

We love feedback and we’d love it if you would pass it on to me directly: josh@keystonefinancial.com . Also please stay plugged in with us, get updates on episodes and help us promote the podcast. You can subscribe to us at Apple Podcasts, Spotify or your favorite podcast service. 

This episode has been prepared for informational purposes only and is not intended to provide and should not be relied upon for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors. Investment Advisory services offered through Keystone Financial Services, an SEC registered investment advisor.