We’ve had more than a few calls recently from worried clients, most of whom had the same basic questions: Now that Trump has taken office again, and is behaving cruelly and sowing chaos, (A) what will the markets do? and (B) what changes should we make to our investments? These are totally reasonable questions to ask, since such dramatic political changes might seem to call for a rethinking of our portfolios and strategies. However: While there is abundant cause for concern in the current political and social situation, our approach has always been to look beyond the current circumstances, and to construct prudent portfolios that can survive most short-term stresses. Briefly, we believe that Trump’s cruel chaos does not create a need to make big changes to your investments at this time.
TRUMP CHAOS & CRUELTY
During Trump’s first term, some commentators argued that “the cruelty is the point” – that an important part of Trump’s strategy then was to use cruelty to keep “the powerless divided and in their place”. This time around, he appears to be adding the intentional creation of maximal chaos to the mix: setting out his agenda in a flurry of executive orders, memos, and proclamations, and pursuing deregulation by firing key staffers in regulatory agencies, for example. This has created confusion and consternation in Washington, as the political norms that have provided “guardrails” for politicians in the past have fallen.
But it appears that Trump and his team may have pushed the chaos game too far, as it may be exposing vulnerabilities in the approach and causing infighting among the factions that propelled him to the White House. There have already been some potent political, legal, and broadly popular responses, which have begun to temper the cruelty and the chaos. And the pushback against Trump’s efforts has grown in the last couple of weeks, too, with clear signs that the political momentum is shifting. None of this means that we can stop working, of course; even if Trump’s team were brought to a halt today, there would still be a lot of troublesome (and probably unconstitutional) actions to roll back. But it is a good start, and I’m feeling optimistic. Remaining engaged, as Pete Buttigieg says, is perhaps more important than ever.
IMPLICATIONS FOR YOUR PORTFOLIO
When it comes to our clients’ investment accounts, there is no need to for most of us to “snap into action”. Even with all the chaos in the country today, there’s not an obvious outcome barreling toward us – so we are much better served by some counter-intuitive advice: “don’t just do something, stand there!”
It looks like Trump’s plans and policies are most likely to have a couple of results. On one hand, the tariffs that he keeps threatening will probably increase inflation, which in turn will probably lead to rising interest rates, and thus to drops in both the bond and stock market as in 2022. On the other hand, his promised cuts to the corporate tax rate (if enacted) would improve the bottom line of most big corporations, which should boost their stock prices. It’s a widely-held truism in the investing world that “the market hates uncertainty”, and Trump’s chaotic approach is making everything less certain; for many market commentators, this implies that a short-term “correction” would not be a surprise … though a continued bull market wouldn’t be surprising, either.
Making short-term predictions of market movements can be a fun game, but isn’t likely to be particularly accurate. Chasing the latest high returns, or trying to avoid potential losses, is how some investors have earned themselves returns substantially lower than the funds in which they’re invested. Their returns are 1.1% lower (about 15% of what could have been expected) over the last decade, according to a recent Morningstar/DALBAR study. Our clients are invested in portfolios which are tailored to their specific needs, based on the best research we can find, and as broadly diversified as we can manage – and we stick to our disciplined approach, even in the face of short-term stresses.
To be sure, there are times when making significant changes to a portfolio might make sense, but those generally have almost nothing to do with market uncertainty. Instead, since markets have moved dramatically in the last couple of years, and some new and interesting investment vehicles have come to the market, we’re taking this opportunity to rebalance client portfolios. This will mean taking some profits from things that are up significantly, and reinvesting in things that are down – following a basic “buy low, sell high” strategy.
HISTORICAL PERSPECTIVE & WHERE TO GO FROM HERE
Shortly after Trump’s first inauguration, we made a post about the likely impacts of his administration on the markets. From that day until Bidens’ inauguration, the S&P 500 rose a total of just over 60%; sitting out Trump’s first presidency would have been a bad idea. During Biden’s term, the index rose a little more than 64%. In the face of uncertainty, we’re adopting what market strategist Jay Pelosky has called a “Stoic Strategy”: “we want to anticipate everything and be surprised by nothing”. And we’re sticking to our knitting, retaining our emphasis on environmental sustainability and social justice, since so-called “woke investments” are really just a great way to realize our fiduciary responsibility to our clients. In a way, our boring approach is incredibly subversive: we’re refusing to sell in a panic when (as the rumor would have it) only the wanna-be American oligarchs are buying, and we’re maintaining our explicit emphasis on investing with our values in the face of cultural backlash against diversity, equity, and inclusion. What could be more prudent, and yet more radical?
Of course, our investment strategies depend primarily on the input you provide. If your personal financial situation has changed, please let us know as soon as possible, as that will imply a need to make an adjustment to your financial plan and investment strategy. But for the vast majority of our clients, sticking to our well-established investment policy is the smartest thing we can do right now. If you have questions / comments / concerns – or if you just want to talk about everything that’s going on – please contact us when you have a moment.
