A Most Curious Land of Donkeys and Elephants – Q3 2016
Dylan B. Minor PhD, MS CFP®, ChFC, CLU
Chief Strategist and CIO
“Everyday Americans need a champion. I want to be that champion!” Hillary Clinton
“Let’s make America great again!” Donald Trump
Have you ever wondered where the symbols for the Democratic and Republican parties came from? According to Wikipedia.com, the Democratic donkey comes from Andrew Jackson’s 1828-run for the US presidency. His opponents called him a jackass. Deciding to turn lemons into lemonade, Jackson embraced the title by using the image of the strong-willed animal in his campaign posters. And he won the election by a landslide.
The elephant, meanwhile, was invented by the cartoonist Thomas Nast who illustrated a Democratic donkey clothed in lion’s skin scaring away zoo animals, one of which was an elephant labeled as the “Republican vote.” Apparently likening the image of earth’s (currently) largest land creature, the Republicans took on the elephant as their mascot and symbol.
While over time the symbols of each party have not changed, the meaning of a Democrat and Republican have changed, and in some cases dramatically. So it also seems that the US presidential debates have changed. On the positive, the past two have become entertaining and excellent fodder for the likes of Saturday Night Live (SNL). See this SNL skit for an entertaining representation of the first debate. On the negative, some have called the debates a disgraceful race to the bottom, devoid of dignity, let alone meaning. I recently met with my daughter’s headmaster at The Anacapa School, who is also her American Government instructor. He lamented on the decline of the quality of the debates. We discussed the possibility of having students compare and contrast past presidential debates to the current ones. This would be a fun and illuminating exercise if you are looking for an additional weekend activity.
Perhaps even more so because of the debates, there are many people concerned about the presidential election and its effect on the US stock market in particular and the US economy in general. Based on professional betting markets, the current probability of Hillary winning is 75-80%, which is quite high, and even higher if factoring in the most recent trend-line. So what will happen to our financial well-being if Hillary is elected over Donald Trump? The short answer is, at least in probability terms, remarkably nothing. Here is a chart that shows the growth of the US stock market while noting various types of presidencies, both those that were of donkeys and elephants:
Source: DFA
As can be seen there is no clear relation between which party holds the White House and the performance of the stock market. And statistical tests verify this casual visual observation. Of more concern, as I have argued before, is who is in control of congress, as it is the law-making body of the land. Of course the president can issue executive orders and veto bills, but this generally represents much less law-making power. The betting markets show the most likely case (65-70% chance) is that the Republicans will lose control of the senate (barely) but retain control of the house (78-85% chance). Such a state of the world means a congress that should be able to do little and a president that should be able to do even less. Even if the Republicans retained control of both chambers of Congress, they would not readily be able to overcome a veto from Clinton. Hence, little conservative policy-making is in the cards. But little liberal policy-making is also in the cards. What does this mean for the economy? It could possibly help it. Indeed, some economists argue, all things equal, limited government tends to help markets. Of course, there are important exceptions to such an idea. Whatever the case, more of the status quote seems the most likely outcome.
The status quo so far this year in the financial markets has been moderately rising markets. In particular, US stocks, which currently represents about ½ of the world’s stock market, have risen 6-8% for the year. Developed international stocks have risen about 3%, whereas emerging international stocks have risen about 15% year-to-date. Commodity prices have risen approximately 9%, although energy prices continued to fall. Meanwhile, bonds rose about 2-6% in total return terms. In contrast, high yield bonds jumped some 15%. Thus, a typical moderate risk balanced portfolio obtained year-to-date returns of 3-4%, whereas a more sophisticated portfolio allocation that was exposed to additional states of the world typically enjoyed larger returns.
All the while, in terms of the economy, the status quo has been a moderately growing economy. Unemployment has on whole continued to drift down. In fact, investors expect the Federal Reserve to raise rates by December, which signifies a sufficiently robust economy that needs a slight tap on the breaks. The general consensus of economists for the near term, a view which I share, is that we will finally see moderately rising rates accompanied by moderately rising to flat US stock markets. In contrast, Emerging Markets look more promising due to current valuations.
All said, a few weeks in politics is still a very, very long time: A lot could happen in the coming weeks (and year), good and bad. So it is we remain committed to our proprietary States of the World Wealth Management® approach. In the end, if we are honest, we really do not know a whole lot in terms of the future. However, what we do know is that at the end of the year the US Stock Market, for example, will be up, down, or the same compared to what it is now. We want to make sure that we are planning for all of these potential scenarios. To this end, we want to plan for the future while protecting the present, as this is our central mission in our care for you.
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