The holiday parties are over and I’ve recently awoken from a white chocolate sugar cake induced coma to think back on the many investing discussions I always get bombarded with at this time of year. While I was attempting to win an award for mass carbohydrate consumption I was repeatedly interrupted by people who seem to think I am a financial “expert”. This conversation usually went like this:
Random person: “Cullen, how about those markets this year? Trump’s really gonna be bullish, huh? What’s your view?”
CR: “Well, you’re talking to a man with a glass of eggnog brandy in one hand and a fistful of carbohydrates in the other, but you asked for it….”
Anyhow, the big trend this year was clear – 2017 will be all about Trump. And as we’ve seen in the media in recent weeks, Trump is perceived as very bullish for the stock market. In fact, a few people even admitted that they’d sold all their bonds and loaded the boat with stocks following the election. My only response to this was: [Chokes on bread pudding] “Wow” [gulps eggnog brandy].
This narrative is attractive – an extremely pro-business Conservative President is coming into office so it probably makes sense to align yourself with his views. And while this would seem to make intuitive sense it has no basis in reality. After all, the stock market tends to do better under Democrats and by a pretty significant margin of 10.8% vs 1.7%.
More importantly, judging stock market performance by Presidencies is silly. The stock market is an inherently long-term instrument with underlying securities that necessarily pay out their cash flows over decades.¹ The Presidency is an inherently short-term and coalescing series of terms whose existence cannot be properly judged within the time frames we apply to it. For instance, did Bill Clinton really Preside over an economic boom or is it fairer to argue that he Presided over a boom that led to a bust? We like to attribute events to certain Presidents because it makes for convenient political narratives, but when viewed through the less ideological lens it becomes clear that you can’t easily separate one Presidential term from the next.²
As we head into 2017 you are likely to be bombarded by political narratives about the next year or the next four years. These stories should be ignored as they have little to do with proper portfolio construction and everything to do with selling a narrative. Most importantly, these stories usually create a conflict between your risk profile and the actual market environment. While narratives can be appealing and even rational sounding, they invariably result in a misalignment of one’s risk profile with their underlying asset allocation as investors make big sweeping moves to align themselves with a narrative that is misaligned with a proper asset allocation according to one’s risk profile.
So, the bottom line is – don’t get Trumped in 2017 by what will become a drumbeat of very attractive and even rational sounding stories about short-term events that should have no bearing on your portfolio construction.
¹ – To better understand the importance of applying specific and appropriate time horizons to various financial assets I would recommend this paper by eggnog and fat pants connoisseur, Cullen Roche.
² – A more appropriate example is the recent stock market performance. While the recent boomlet is attributed to Trump’s win it will go down in the history books as part of the Obama term.
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