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Ask the Expert: How Elections Affect the Markets

Ron Joelson •  September 8, 2016 | Your Finances, Ask the Expert

Each month, we book time with some of our company’s top financial brain power to answer questions about investing and your finances. This month we’re talking about how elections impact the markets.

Do you have a question for our financial experts? Email it to us at: AskTheExpert@northwesternmutual.com

Ron Joelson

Ron Joelson is Northwestern Mutual's chief investment officer and oversees the company's general account, valued at approximately $200 billion as of June 2016.

Mark McLennon

Mark McLennon is vice president of Investment Products and Services (IPS) Business Development. He oversees the fee-based financial planning program and departmental growth initiatives.

Brent Schutte

Brent Schutte is chief investment strategist of Northwestern Mutual Wealth Management Company. He oversees the investment philosophy for individual retail investors and the investment strategy for more than $100 billion in assets under management as of February 2016.

The following is an excerpt from our Ask the Financial Expert podcast (listen to the entire podcast below):

Mark: It’s been pretty hard to watch TV or read the news without seeing something about the upcoming election, especially here in Wisconsin, a swing state. Seems everything is all geared toward the election. That brings up the question we hear from so many people: Are election years good or bad for investors?

Ron: There are a lot of different ways of looking at it. We can start with a statistical quick look. If you look back at various elections, you can generally see that the first two years of a president’s term generally have been more of a bearish tone, and then the last two have been bullish. But the problem with that is that the numbers vary so differently in certain circumstances. For example, if you look at an eight-year term for a single president, then the last year has been particularly bad, like 2008. So there are all these exceptions to the rules. When you include the fact that there aren’t many data points, I think it’s not all that statistically significant, so I think it’s dangerous to draw too many conclusions.

Brent: I agree with that. There are so many external variables besides just who is in the office and what year it is. I think back to different presidential cycles; were Republicans better or Democrats better for the market? And I think it’s hard to draw a conclusion. A lot of times when a president gets elected, [his] platform doesn’t actually happen because so many other things occur—for instance, September 11th.

The other thing, I think, is that a lot of times it’s the cards that are dealt for whoever’s coming into office. Go back to 1999 with the market trading at 50 times earnings. There wasn’t much of a hope for whoever came in office back then because the market was pretty overvalued.

Mark: Just like eight years ago was pretty undervalued, it would have to go up.

Ron: Right. Now, looking into this election, we’ve never had the central banks around the world doing what they’re doing, and that adds something that is far more impactful in the markets than the timing of an election.

Mark: Moving to the current election, what would you see as the effect of either of the two current major candidates getting elected?

Ron: I get this question a lot when I travel. I really don’t think we know the answer. However, I think the general belief is that if Hillary Clinton were elected, there would be less change. Therefore, I think there would be less volatility and less of a major impact.

I’m not saying I prefer her or not.

Donald Trump doesn’t really have a track record in politics, and people don’t really know what he would do. I think that creates more concern and, probably, more volatility.

Brent: From a broader perspective, the overall U.S. system of government pulls back the effect that a president can actually have. With $17 to $18 trillion dollars, the president’s effect could more likely affect certain sectors (like the softening we recently saw in biotech because one candidate is perceived to be less friendly to it than the other) rather than the economy as a whole.

Hear more from Ron, Brent and Mark in the “Ask the Financial Expert” podcast:

Do you have a question for our financial experts? Email it to us at: AskTheExpert@northwesternmutual.com


The opinions expressed are those of individual investment professionals as of the date stated on this article and are subject to change. This material does not constitute investment advice, is not intended as an endorsement of any specific investment or security and is not a prediction of what will happen in the markets.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. With fixed income securities, such as bonds, interest rates and bond prices tend to move in opposite directions. When interest rates fall, bond prices typically rise; and conversely, when interest rates rise, bond prices typically fall. This also holds true for bond mutual funds. When interest rates are at low levels, there is risk that a sustained rise in interest rates may cause losses to the price of bonds or market value of bond funds that you own. At maturity, however, the issuer of the bond is obligated to return the principal to the investor. The longer the maturity of a bond or of bonds held in a bond fund, the greater the degree of a price or market value change resulting from a change in interest rates (also known as duration risk). Bond funds continuously replace the bonds they hold as they mature and thus do not usually have maturity dates and are not obligated to return the investor’s principal. Additionally, high-yield bonds and bond funds that invest in high-yield bonds present greater credit risk than investment grade bonds. Bond and bond fund investors should carefully consider risks such as interest rate risk, credit risk, liquidity risk and inflation risk before investing in a particular bond or bond fund.

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