Midterm elections may raise concerns about the impact of a changing of the political guard on retirement portfolios, but they are also a rare opportunity for advisors to gain new insights into client thinking.
So says John Diehl, senior vice president of applied knowledge at investment firm Hartford Funds, which manages about $117.8 billion in assets. Diehl, who often talks to advisers at his firm and their clients about the psychology of investing, said elections provide a chance to get to know a client better than would be possible at other times.
People who show a keen interest in politics are often eager to talk about the news. Open discussions can lead to all sorts of paths.
“Emotions surrounding elections can be a sort of intro into someone’s worldview,” Diehl said. “Not all advisors are open to this. But there is an opportunity to try to understand the client’s story a bit more, to try to understand if there was a triggering event, an experience that changed his political views in one way or another.”
That’s not to say, Diehl added, that he would recommend one investment strategy for Democratic clients and another for those who are Republicans. Yet discussions of hot political issues can help an adviser gauge a client’s likely interest in investing in something that is now politically charged, such as a fund invested according to environmental, social and governance principles.
Diehl said a councilor’s job during an election is often to act as a “circuit breaker.” Clients often worry that a change in Congress and the White House will lead to a series of regulations, deregulations or tax changes that affect the companies in which they have invested.
“They are generally unhappy with the volatility and unpredictability of the election,” Diehl said.
A Hartford Funds survey in October of 874 people with $100,000 or more to invest found nearly 90% of respondents believed intermediaries would affect their portfolios in some way, but only 38% were planning to make changes. The data also suggests that young people were more likely to follow a different path in response to the election outcome.
The November 8 midterm elections saw Republicans make expected gains in the House, but not much as some polls had originally suggested. Control over the tightly divided Senate remains up in the air, with a runoff scheduled between Georgian Democratic incumbent Raphael Warnock and Republican rival Herschel Walker.
An online publication by two Morgan Stanley researchers — Michael Zezas, head of thematic research and global public policy at the firm, and Seth Carpenter, chief global economist — suggested a strong showing from Democrats could undermine the idea that “inflation is a liability.” election” for the party.
“Investors may view this result as a license for the party to ease policy and legislative constraints that prevented Congress from enacting some of the fiscally expansionary policies that were part of President Biden’s original ‘Build Back Better’ agenda,” they said. they wrote.
Investor concerns tend to be less pronounced mid-term and more so when presidential candidates are on the ballot. In these latest contests, attention is intensely focused on the policies of two prominent national candidates and the likely ramifications of either winning. But whether the contests are presidential or midterm, the the results rarely make a big difference to investors’ portfolios, says Diehl. This is especially true at times like now, with the probability of a divided government which makes the chances of sweeping changes at the federal level slim.
Longer-term trends in federal policy and the general state of the economy are more important. Suggested polls that the economy was a priority for many voters who voted midterm this year. Diehl said clients are much more on the right track when considering how factors such as inflation, the Federal Reserve’s aggressive interest rate policy and the prospect of a recession will affect their wallets. But that doesn’t mean they have to make instinctive changes in their holdings.
“We all know that emotions and investment decisions don’t always make the best match,” Diehl said. “The best approach is still diversification. That’s why we want to make sure clients come into this election season with a well-spread portfolio.”
This advice to stay the course featured prominently in a Nov. 7 webinar by data and analytics firm VettaFi, with investment professionals saying history suggests stocks will see an uptick after the mid-course dust will have subsided.
Matthew Bartolini, managing director of investment firm State Street Global Advisors, told the webinar that the S&P 500 has shown growth after nearly every midterm election held in the past 80 years. This was even the case after the midterms of 1978, when the country also faced the prospect of high inflation and an impending recession. Bartolini said while any bump is unlikely to be as big this time as in years when the economy was in a better place, he wouldn’t be surprised to see one.
Jonathan Boyar, managing director of New York-based investment firm Boyar Asset Management, agreed that the shares could be improved.
“We wouldn’t be surprised to see a rally in the fourth quarter, as the US stock market appears to be heavily oversold at the moment, but investors should moderate their expectations amid plenty of near-term headwinds. , including the war in Ukraine, a hawkish Federal Reserve, ongoing supply chain issues and continued high inflation,” he said in emailed comments.
Rather than trying to predict how politics will affect portfolios, Boyar said, clients should “keep their emotions in check and instead focus on the fundamentals of the companies they own or would like to buy.”
Another webinar speaker, Adam Grossman, director of global equity investments at RiverFront Investment Group, based in Richmond, Va., said a divided government could pave the way for equity volatility in at least one way. . A political fight over the US debt ceiling — the limit Congress has imposed on itself on how much the federal government is allowed to borrow — looms next year. The current ceiling is $31.4 trillion, while the national debt is $31 trillion. Republicans have said they will use the threat of allowing the government to default on its debt, if the cap is breached, to push for their policy priorities in negotiations with President Joe Biden.
True, lawmakers have already threatened to allow a default before backing down at the last minute.
Still, “there will be political theatrics around the debt ceiling,” Grossman said. “And that will lead to short-term volatility.”