Analysis, Insights and a different perspective
March 2016
Don’t Play Politics with your Portfolio
Investor anxiety often grows as a Presidential election approaches. In this issue of Investment Insights, we discuss the reasons why we believe it doesn’t make sense to play politics
with your portfolio.
Here is our advice:

Investor anxiety often grows as a major election
approaches because of the increased uncertainty.

History has shown that there are differences in the
performance of financial markets under different
political scenarios, but these differences are unpredictable, and attributable to many factors, not just
politics.

It’s a mistake to make important investment decisions in response to political developments. Market forces are more powerful than political forces.

Our success, growth and resiliency as a nation are
the result of capitalistic, free-market forces that unleash the entrepreneurial spirit of the American
people. That is something that politicians will find
very difficult to stop.
Campaign Season is Here
Investor anxiety often grows as a major election approaches for two big reasons. First, to get elected, politicians will often exaggerate how bad things are, and
how, if you just cast a vote for them, things will really
improve. When the campaign rhetoric heats up, investors often start to believe things are really bad and
begin to worry about the future. Second, it’s a basic
human instinct to fear uncertainty, and we certainly
have no idea how a Presidential candidate might perform before he occupies the Oval Office.
1 Yr
3 Yr
5 Yr
10 Yr
U.S. Large Stocks
-6.27
10.53
9.85
6.35
U.S. Small Stocks
U.S. Bonds
-16.29
1.79
4.48
2.19
5.36
3.66
4.71
4.66
Intl Markets Stocks
-16.01
-2.30
-1.37
1.56
Intl Emerging Mkts Stocks
-23.36
-9.44
-5.61
1.81
1.38
0.96
1.47
1.80
U.S. Inflation (CPI)
Source: Morningstar. Annualized returns for periods ended February 19, 2016. U.S. large stocks is the S&P 500 Index, U.S.
small stocks is the Russell 2000 Index, U.S. Bonds is the Barclays US Aggregate Bond Index, Intl Developed Markets is the
MSCI All Country World Index Ex-US, International Emerging
Markets is the MSCI Emerging Markets Index. Returns include
dividends and interest. Past performance is not an indication of
future results. All indices are unmanaged and may not be invested into directly. The Indices mentioned in this report are
unmanaged, may not be invested into directly and do not reflect
expenses or fees.
Investors often want to make important investment decisions in response to an approaching election. Those
who tend to vote Republican want to sell if it looks like
a Democrat might become President and vice versa.
But how have financial markets and the economy performed under different political scenarios? Below we
present the track record of the financial markets and
the economy under different combinations of political
parties in power.
better performance for the bond market.
But what does this history lesson say about causality?
In other words, did Democratic Presidents support policies that caused better stock market performance? Did
Republicans really do a better job of controlling inflation
which led to better bond market performance? Or did
things just work out that way?
Performance of Stocks, Bonds, Inflation and the Economy (3/4/1901—2/17/2016)
Stocks
(DJIA)
Industrial
Production
Inflation
(CPI)
LT Gov’t
Bonds
Democratic President
7.66
5.01
4.21
3.73
Republican President
3.02
1.81
1.80
7.74
Democratic Congress
5.99
4.39
4.24
5.07
Republican Congress
3.82
1.51
0.73
7.11
Dem Pres, Dem Congress
7.16
6.06
4.40
2.18
Dem Pres, Rep Congress
9.47
1.35
3.52
9.64
Rep Pres, Rep Congress
1.70
1.57
-0.37
5.48
Rep Pres, Dem Congress
4.46
2.04
4.01
8.99
All Periods Buy/Hold
5.18
3.33
2.94
5.64
Source: Ned Davis Research, Stock returns exclude dividends
What can we conclude from this history lesson? A
look at the past would suggest that the stock market
and the economy performed better under Democratic
Presidents. It seems the best scenario for the stock
market was a Democratic President and a Republican
Congress. However, Republicans seem to have the
upper-hand in controlling inflation, which resulted in
Should Eisenhower’s economic policies be credited for
creating solid growth with low inflation in the 1950s?
Should Jimmy Carter be blamed for the energy crisis
and rampant inflation in the late-1970s? President
Clinton presided over a booming economy in the
1990s, was that a result of his keen stewardship of the
economy, or Fed Chairman Alan Greenspan’s?
Table shows Dow Jones Industrial Average on election day of that year.
Was it coincidence that the economy was ending a recession as he took office? What about President
George W. Bush, who took office at roughly the same
moment that the technology bubble was bursting, he
left office as the Great Recession was beginning to
unfold.
If you suspect there is more at work here than politics,
then you are probably right. It’s true, our political leaders can have a meaningful impact on economic growth,
jobs, interest rates and inflation through changes in tax
policy , government spending, and regulatory policies
which can effect the outlook for the economy as well as
specific industries. But can these impacts be anticipated? What about all of the other factors that can impact
stock and bond prices? Sometimes the skill of the
head coach can be the difference in winning or losing
the big game. But most of the time, it’s the performance of the entire team that determines the outcomes
of the game. (In spite of this, it’s often the coach that
gets the credit or the blame!)
Also, remember that many big promises are made during political campaigns that never come to pass. When
these promises are subjected to the political process,
our system of checks and balances will often reject
ideas that are overly radical or ambitious. Of course,
there are large exceptions to that rule. But the bottom
line is this: Over the long term, market forces are more
powerful that political forces. We believe our success,
growth and resiliency as a nation are the result of capitalistic, free-market forces that unleash the entrepreneurial spirit of the American people. Decisions that
are made in Washington will impact our lives in many
ways. But our country over the long-term has withstood a wide variety of political leaders and ideas that
have emanated from Washington, D.C. Elections bring
about change. But one that that will not change is our
optimism that the long-term future is bright, and oppor-
tunities abound, no matter what the new political season brings.
“It’s the worst system in the world—except for everything else” - Winston Churchill
Eleanor Roosevelt, playing off the title of Kennedy’s
Pulitzer Prize-winning book, airily dismissed him as
more profile than courage. Similarly, it was Walter
Lippmann’s enduring misfortune to size up FDR and
belittle him: Roosevelt, he wrote, was “a pleasant man
who, without any important qualifications for office,
would very much like to be president.” Lippmann later
in life recognized that he had underestimated Roosevelt.
Market forces are more important than political
forces
By and large, our nation’s economy has always had a
more powerful impact on the financial markets than its
politics. And the Federal Reserve has played a larger
role in steering our nation’s economy in the short-term
than the White House. We believe investors with longterm goals like saving for retirement tend to place too
much emphasis on who is in the White House or which
party currently controls Congress.
For example, many investors thought Ronald Reagan
would start World War III, and sold stocks, yet the
1980s were a golden decade for the stock market.
Many investors were very concerned about a Clinton
victory in 1992, yet the Dow Jones Industrial Average
nearly doubled in his first four years in office (and tripled over the course of his 8 year term).
The decisions that our Presidents make are critical to
the future of our country. We’ve had some strong
Table shows Dow Jones Industrial Average on election day of that year.
leaders, and some weak ones. Presidential politics will
often dominate the mood of investors when the campaign season heats up, but it shouldn’t. Our nation has
survived impeachment, assassination, Depression,
Civil War, and any number of government scandals
and crises. In every case, we’ve come out ahead. In
every case, over the long run, the U.S. economy has
continued to grow and the U.S. stock market has reflected that growth. When it comes to elections, study
the issues, vote your conscience, but don’t make radical changes to your investment portfolio if your favorite
candidate does not win. Instead, be patient and stay
the course.
Here’s an interesting stock market fact to share
with your friends
From 1897 through 2004, 93% of the gains in the Dow
Jones Industrial Average (excluding dividends) came
on days when Congress was out of session! Maybe
Judge Gideon J. Tucker had it right when he said, “No
man’s life, liberty, or property is safe while the Legislature is in session.”
Source: “Congress and the Stock Market by Michael F. Ferguson
and H. Douglas Witte. Past performance is not an indication of future
results. An index is not managed and is unavailable for direct investment.
Important Disclosures:
The information contained in this report is as of February 19, 2016
and was taken from sources believed to be reliable. It is intended
only for personal use. To obtain additional information, contact Cornerstone Wealth Management. This report was prepared by Cornerstone Wealth Management. The opinions voiced in this material are
for general information only and are not intended to provide specific
advice or recommendations for any individual. To determine which
investment(s) may be appropriate for you, consult your financial advisor prior to investing. Content in this report is for general information
only and not intended to provide specific advice or recommendations
for any individual.
Model Wealth Program Update
As most investors are aware, the stock market has
experienced considerable volatility in the first few
weeks of the new year. Concerns surrounding global
economic weakness, falling oil prices, and the Federal Reserve’s interest rate hike in December of last
year have sparked a general correction in stock prices. Commodities, emerging markets, small stocks,
and lower grade, high-yield bonds have all been especially hard hit.
Rest assured, the portfolios we manage have very
small weightings in each of these areas. Last year,
we systematically lightened up on the riskiest areas of
the market in an effort to prepare for what we felt was
a correction in the markets which was overdue.
If you have any questions about your investments, or
what like to know more about our Model Wealth Program, please contact your Cornerstone Wealth Management investment advisor.
For non-advisory investors, the information above is
for information only.
Alan F. Skrainka, CFA
Chief Investment Officer
Cornerstone Wealth Management
www.mycwmusa.com
The fast pace swings in commodities and currencies will result in
significant volatility in an investor’s holdings. International investing
involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often
heightened for investments in emerging markets. The price of small
cap stocks are generally more volatile than large cap stocks. High
yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks
than those graded BBB and above. They generally should be part of
a diversified portfolio for sophisticated investors.
Investing involves risk including the potential loss of principal. No
strategy can assure success or protection against loss. Past performance is no guarantee of future results.
The Standard & Poor’s 500 Index is a capitalization weighted index of
500 stocks designed to measure performance of the broad domestic
economy through changes in the aggregate market value of 500
stocks representing all major industries.
Securities offered through LPL Financial, Member FINRA/
SIPC.
13924 Coalfield Commons Place l Suite 101
Midlothian, VA 23114 l www.bellrogers.com
(O) 804-378-8080 l (TF) 855-378-8080
(Fax) 804-378-8220 l [email protected]