November 2, 2018
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When times of uncertainty enter the market it is vital to remember that the fundamental value of a stock is based on future cash flow…that is profit, discounted to present value. Therefore, the stock market is simply the sum of the values of all the individual stocks reflecting the expected future profits discounted back to present value. If businesses expect to make more profit, more investors buy, driving up prices.
When it comes to impeachment, elections, or any future event…the market has already taken into account the “predictive process” in sum. That is to say if most people feel a “Blue Wave” will result in major changes or impeachment possibilities…much of this has already been accounted for in prices. Which makes sense since we have seen a roughly 10% decline from top to bottom on concerns about election, interest rates, and the trade war. As the market begins to see these uncertainties removed or addressed then it will rise again assuming no other uncertainties would outweigh. Over the long run, all the white noise gets filtered out and markets will…dare I say must reflect profits of companies. Because you are not buying election results….you are buying profits.
That’s great, but you want more data still?
*Some information below adapted from CNN Money
Lets cut to the chase of real concern…impeachment. While I do not see any legal grounds that this is currently possible, a democrat-controlled congress would certainly place political pressure to attempt. I find it hard to believe the numbers could even be reached…but lets go down this theoretical what if journey.
For starters, markets didn’t move at all on the news of Manafort’s conviction and Cohen’s guilty plea. This likely means the market as a whole does not believe Trump will be impeached, or that Trump’s impeachment wouldn’t have a big impact on the value of American businesses. Investors could also think a President Pence with a Democratic-controlled House (and even Senate) might be good for business. Even if Trump is impeached, his tax cuts for corporations and the rollback of regulations are not likely to be reversed for many years should Pence become president.
So would impeachment — and removal — of a standing US president cause the market to crash?
Richard Nixon resigned from the presidency in 1974. It was during a time of increased economic uncertainty, thanks to rising inflation that led to a “lost decade” for US investors. In the 1970s, inflation had a far larger and longer-lasting impact on investment performance than Nixon’s resignation. Bill Clinton was impeached in 1998, but he was not removed from office. For investors, the tech bubble of the late 1990s was of far greater importance. Following the 1998 emerging market meltdown, equity markets surged as the Fed eased monetary policy and investors scrambled to buy Internet stocks. Clinton’s Impeachment barely caused a ripple.
We can draw lessons from history. Most importantly, the health of the economy and corporate profits largely determine how stock markets perform.
Today, the greatest risk for investors remains a destabilizing escalation of trade conflict or an unanticipated surge in US inflation, which would force the Fed to tighten aggressively. The election may cause markets to temporarily move up or down a little faster for a few days. Once the dust settles, participants will get back to the business of analyzing future profits relative to rates same as always.
The best course of action …stick to your long-term plan.
“Unless commitment is made, there are only promises and hopes; but no plans.” –Peter F. Drucker
Need More Convincing?
Click HERE for a data centric article on elections taken from our 2016 archives.
Evergreen Wealth Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.