A college classmate wrote me an email recently, asking my opinion about the state of the world, and the markets, in the current political climate.
Since the election there’s a nagging voice in my head saying that the money I’m investing is just going to go away on account of unsound economic policies that I assume are in the not too distant future.
I understand the idea of the long game, weathering the ups and downs, etc. I’m young still, and retirement is by no means imminent. What gets me anxious is the possibility that we are truly in uncharted waters where any assumptions about our economy are up for grabs … but I’m still investing based on those assumptions. Because I have so little experience in any of this, it’s difficult to understand my instincts. So I’m asking you. What do you think?
These are great questions. Not easy questions, of course, but great things to be wondering about … and it seems like a lot of folks have the same set of questions. So — with the caveat that this isn’t advice, or any sort of prediction really, but just a discussion of factors that might affect the path of the economy — here’s how I responded.
In the immediate aftermath of the election, it wasn’t clear what Trump really wanted to do, or how likely it was that he’d be able to get the Congress to go along. Now that we’ve got a taste of his approach … well, it’s still not entirely clear. The economists I listen to most closely are paying careful attention to the basic business climate; according to them, it looks like Trump’s election raised the odds of a recession & market correction in 2017 from about 1 in 5 to about 1 in 3. That’s probably not high enough odds to necessitate changes to your asset allocation … though it might make sense to rebalance your portfolio, so that you take what profits you may have.
It’s also a pretty good time, probably, to make sure that you have a well-diversified portfolio. Substantial exposure to markets outside the US is probably a good idea, since if the US gets itself stuck in some sort of isolationist weirdness, the rest of the world might be able to pick up that slack and push things forward. Bonds are dragging on portfolios recently, and that drag is likely to continue while the Fed raises interest rates, but having an allocation there will still help dampen portfolio volatility overall. (Click here for information from the SEC on asset allocation, diversification, and rebalancing)
I think that for the moment, really, Trump is not so much a harbinger of doom (economically speaking) as a wild card: he says he wants to help American business, but it’s not clear how the policy outlines he’s offered so far could actually benefit companies. Historically speaking, the economy and the markets perform slightly worse under Republican presidents than Democrats — but Trump is no ordinary Republican (if he deserves that label at all). So we’re in a tough spot, because we don’t know quite what he really wants to do, what the Congressional Republicans are going to try to make him do, and what the handful of Democrats with a spine will be able to hold up. The markets generally don’t like uncertainty, and I think that’s why we’ve seen the markets move the way they have: the S&P 500 index moved up from ~2100 to ~2250 in the month after the election, and has just wandered back and forth between 2250 and 2300 since. (Click here to see performance charts for the S&P 500 index)
In the larger scheme of things — on a world-historical sort of scale — I don’t know what we’re facing, either. Could Trump be the end of American democracy? Unlikely, but possible, sure. Could he spark a world-wide trade war, and then perhaps a world-wide shooting war? That also seems unlikely but possible. In either case — would civilization itself be collapsing? Kinda. If so, how much money we have in our brokerage accounts won’t matter, really, so I don’t think we need to spend much time trying to build a collapse-of-civilization-proof portfolio. There’s plenty of work to be done in the meanwhile: trying to encourage political sanity, trying to prevent climate disaster, trying to catalyze the “next economy”, that sort of thing. So, you know, that’s what I’m spending my time working on.
Does all that make sense? It got a little longer than I meant … but I’m glad I had the opportunity to write it all up. And please contact us if you have follow-up questions, or want to know how we can help you to bring your investments in line with your values — political, economic, social, environmental, we’re pretty sure we can help.