Markets & Polls - Are There More Important Factors to Consider?
Dear clients and friends,
With the election fast approaching the polls are tighter than ever. Never before (in our memories, at least) have voters been forced to choose between two generally unpopular candidates. Considering we are electing the next leader of the free world, this is disappointing.
After a positive rally in July and August, the markets have coincidentally dipped as Trump’s poll numbers have climbed though, overall, most agree that the election is simply one aspect of the elaborate forces that affect the market. While Democrats are typically not considered “business friendly,” Hillary Clinton represents more predictable leadership than Donald Trump. Furthermore, a Clinton presidency coupled with a Republican-dominated Congress will likely cause gridlock in Washington. For some reason, gridlock is a desirable outcome in the minds of market participants.
What are the implications for next Wednesday? We believe a Clinton win could cause a bounce in the market, while a Trump victory will lead to a decline similar to “Brexit” (sharp but short-lived). Depending on early exit polls, we might begin to see one of these reactions before the market closes on Tuesday.
The most important factor in determining the trajectory of markets is occurring outside of presidential election news: third-quarter earnings. According to Factset data, the percentage of companies beating earnings expectations is 74%. This is seven full percentage points higher than the 5-year average. Furthermore, this is the first quarter in almost two years that we have seen positive year-over-year earnings growth (all data from Factset Earnings Insight 10/28/16). These are both good things.
As fundamental investors, earnings are a primary driver of our investment decisions. For this reason, we are approaching this election the same way we approached Brexit: holding steady. We believe that liquidating good long-term investments to protect against a potentially short-lived risk tends to cause more harm than good. If we do see a sharp decline, it likely represents an opportunity to put a bit of cash to work.
We are limiting our appointment schedule next week in order to keep a close eye on the election and its effect on markets, but also to make ourselves available to all of you in case you have questions. Please do not hesitate to give us a call to discuss your concerns or to talk about something entirely unrelated. We will welcome the distraction.
All the best,
Ben & Peter
Disclaimer: The views and opinions expressed in this article are those of Gore Capital Management and do not reflect the position of Cantella & Co, its directors, officers or principals of the Firm. Cantella & Co. is not responsible for the accuracy of any of the information supplied by the authors of this article. Securities and Advisory Services offered through Cantella & Co., Inc. Member FINRA/SIPC.