Buy? Sell? Politics May Move the Market, nevertheless Rarely for Long

I obviously can’t answer the first question. As for selling stocks, my answer, as which has been consistently since the election, will be “no,” at least not because of the troubles swirling around the president.

Consider what has happened inside days since the headline-doing news. By the middle of which week, the Standard & Poor’s 500-stock index had recovered virtually everything which lost after the Trump-Russia news broke, as well as also on Thursday which closed at a fresh high.

Brazil’s Bovespa index regained much of the ground which lost last week as well as also was in positive territory for the year to date.

Within a month of Brexit, European stocks had recovered nearly all their losses. which year European stock markets have been notching fresh highs.

Markets May Shrug Off Political Crises

Political crises often do not in themselves have lasting negative effects on the stock markets. London’s FTSE recovered soon after the shock of the Brexit vote, as well as also indexes inside United States as well as also Brazil have turned up since the initial reaction to last week’s crises in those countries.

Reactions of world markets to recent crises

JUNE 23, 2016 Brexit vote passes, as Britain votes to leave the European Union.

MAY 16, 2017 Reports surface which President Trump had tried to stop an F.B.I. investigation of his former national security adviser.

MAY 17, 2017 News breaks which President Michel Temer of Brazil had taken millions of dollars in graft payments.

Even some of Wall Street’s most famous as well as also successful investors have been struggling which year to turn political upheaval into market gains. Paulson & Company as well as also Soros Fund Management, two of the best-known global macro hedge funds, which make bets on geopolitical events, lost billions last year according to an annual hedge fund ranking compiled by LCH Investments. Paul Tudor Jones’s Tudor Investment, another macro fund, was flat, as well as also Mr. Jones recently told investors he’s taking on more risk as well as also shifting to more quantitative strategies in an effort to enhance performance.

A macro hedge fund index compiled by Hedge Fund Research will be down nearly 1 percent since Jan. 1 as well as also over 4 percent for the last 12 months, one of the worst performing hedge fund indexes. Meanwhile, the S.&P. 500 gained almost 10 percent in 2016 as well as also will be up more than 7 percent which year.

By as well as also large, “investors should tune out political events,” said James B. Stack, president of InvesTech Research as well as also Stack Financial Management, who has done a study of what he calls “crisis events” as well as also their effect on markets. “Historically speaking, as well as also as a seasoned investor, I’d say investors should just ignore geopolitical events like Brexit or whatever will be happening in Brazil.”

The problem, Mr. Stack’s research has found, will be which “geopolitical events may be widely feared, as well as also there will often be a knee-jerk market reaction when they’re unexpected, nevertheless seldom do they have a lasting impact. Underlying economic trends as well as also monetary policy are far more important.”

Markus Schomer, chief economist at the asset manager PineBridge Investments, made a similar point. As fundamental investors with longer time horizons, “we try not to be distracted by the political noise,” he said. “I’ve been telling even our traders with shorter time horizons which what we’re seeing doesn’t actually affect the economy or monetary policy, which will be more important for markets than anything else.”

Mr. Stack noted which stocks declined sharply after the terrorist attacks of Sept. 11, 2001. nevertheless the bear market as well as also recession which followed the technology bubble which exploded in 2000 were already well underway by then. September 2001 turned out to be an unusually bad time to sell stocks: By fresh Year’s Day 2002, little more than three months after the post-9/11 low reached on Sept. 21, the S.&P. 500 had gained close to 20 percent.

A more recent example was the showdown over the federal debt ceiling in 2011, when Standard & Poor’s downgraded United States government securities for the very first time amid fears the government might default on its debt. “Stocks dropped 15 percent in less than two months as well as also we were on the brink of a bear market,” Mr. Stack said. “Once the crisis was resolved, stocks came roaring back,” as well as also had regained all their losses by year-end.

Of 11 major geopolitical events examined by Mr. Stack’s firm, only two — the Nazi invasion of France in May 1940, as well as also Japan’s bombing of Pearl Harbor in December 1941 — led to market losses over one-week, three-month as well as also one-year periods (as well as also inside case of Pearl Harbor, the one-year decline was less than 1 percent).

President John F. Kennedy’s assassination had no discernible impact: Stocks were up more than 20 percent a year later.

As geopolitical crises go, those were pretty big shocks to markets as well as also investor psychology. So far, nothing inside Trump administration has come close. Still, expectations which Mr. Trump as well as also a Republican Congress might succeed in enacting business- as well as also shareholder-friendly tax as well as also regulatory adjustments are part of what has driven recent market gains.

Mr. Stack noted which measures of confidence among little businesses, chief executives as well as also consumers are at or near record levels. “There’s no doubt which expectations have accelerated since the election,” he said. “So the question will be whether political turmoil will turn those expectations upside down,” leading to a loss of confidence as well as also lower consumer spending. which could happen, nevertheless so far, “we’re not seeing any evidence of which,” he said.

He said comparisons to the Watergate-era bear market of 1973-74 were off base, because then the country was in recession, the Arab oil crisis sent gasoline prices surging, inflation was raging as well as also interest rates hit record highs. Arguably, President Richard M. Nixon’s abandonment of the gold standard as well as also the transition to market-determined currency exchange rates had more to do with plunging stock prices than his crumbling presidency.

Mr. Schomer said a failure to act upon many of Mr. Trump’s spending as well as also tax proposals might not be such a bad thing for markets, given which the United States economy will be already at or close to full employment as well as also doesn’t need additional stimulus. “At the end of the day, the only reason we’ll have a recession will be if the Fed will be forced to raise interest rates too quickly, unless we have a massive crisis, which I don’t see happening,” he said.

If anything, history suggests which long-term investors should buy stocks after markets fall on bad geopolitical news, not sell. nevertheless which’s not to say which time won’t prove to be an exception, or which markets won’t correct for additional reasons.

Whatever happens with President Trump, the United States will be inside ninth year of the second-longest bull market since World War II; none have made which past 10 years. Valuations are getting stretched. Sooner or later, there will be another correction, as well as also eventually a bear market.

Nonetheless, Mr. Schomer says he sees no imminent end to the bull market. “We’re not going to see a 25 percent surge which year, nevertheless which economic cycle will be so slow as well as also steady with so few imbalances, we could end up with 8 to 10 percent gains the next few years as well as also a much greater degree of overvaluation.”

For his part, Mr. Stack said: “We still believe which market will hit fresh highs in 2017, nevertheless the low volatility as well as also the high valuations suggest which will be not a low-risk market. which’s not a market in which you should be investing large sums of fresh capital.”

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