Decision 2016

Electing the Economy

How investors are finding the calm within the storm

By Michael Kanigher

Mr. Kanigher is Managing Director – Wealth Management with UBS Financial Services, Inc. Visit ubs.com

Today, more than ever, it feels like what was once thought impossible is actually possible.

Pharmaceutical research is getting closer and closer to curing cancer and Alzheimer’s disease. Self-parking cars are a reality and a race is on among tech and auto giants to introduce a self-driving car. This year NASA’s Juno spacecraft reached Jupiter’s orbit more than 300 million miles away , providing previously unseen views and critical new data on the mysterious planet. Along with many other examples of progress and other drivers of quality of life, the “impossible becoming possible” environment has led to many demographic segments, particularly younger generations, feeling optimistic about the future and the opportunities they believe it will provide .

But the pendulum swings both ways, and situations and events formerly thought unimaginable are actually happening, inspiring fear and trepidation about the future not just in the United States, but around the world: The United Kingdom voting to leave the European Union; the rise of domestic terrorism in the U.S. and Europe; natural disasters from massive storms to droughts occurring on a never-before-seen scale.

High on the list of unpredictable and unusual current events is this year’s U.S. presidential election, which the entire country (and many throughout the world) I believe is watching evolve seemingly minute by minute.

The unusual mix of candidates from both parties, unexpected activities at the conventions, and divisive rhetoric within and between parties, has likely caused many Americans to view this election as a “game changing” event.

As a result, investors are likely making or considering changes to their portfolios based on the expected outcome of the election as they think the winner may impact their financial well-being. Specifically, the 3Q 2016 Investor Watch, surveyed more than 2,300 wealthy investors, found that nearly half of investors (47%) are considering reducing their investments with another 10% already making sector adjustments.

So, in this chaotic and anxious environment, how can financial advisors ease clients’ minds and help them protect and grow their wealth for the future?

Level-Set Expectations

In my experience, the U.S. presidential election is not something that needs to be brought up with clients proactively, it’s a topic that comes up quite frequently and naturally during short- and long-term planning discussions. This is unsurprising due to the election’s constant presence in the daily news cycle, likely putting it at the top of investors’ list of concerns and the top of mine, as their financial advisor, to address.

But because I can’t predict who will win, and therefore how the election’s outcome could impact various industries or investment products, helping clients manage through this is the challenge. It’s even more so this year as many clients see the election as a referendum on the state of our country.

The prevailing feeling among my clients is that they are discouraged by current events in the U.S. and pessimistic about the future of the country. They see the U.S. as strongly divided into two extreme political camps with little hope for reconciliation or ability to collaborate for meaningful change. Some even feel the divide is widening as we head towards the general election in November.

Coupled with persistent market volatility, investors are uneasy when it comes to their finances, hesitant to put their wealth to work before it’s clear who will be the next leader of the Free World. Consequently, even wealthy investors are holding onto large cash allocations or, worse, threatening to pull out of the market entirely as UBS’s latest Investor Watch report found.

But while their anxiety is understandable, my main responsibility as a financial advisor is to work with my clients to level-set their expectations about how significant the effect of the election could have on the markets. To accomplish this, I consistently remind clients of three important facts:

  1. the market volatility and intense emotions provoked by the election are temporary (similar to what we saw with the Brexit vote),
  2. Presidential contests rarely have a long-term impact on markets , and 3) keeping their money “under the mattress,” metaphorically speaking, is not a long-term solution to anything.

This is not the first time the country has faced presidential candidates that are polar opposites (even though 81% of Investor Watch respondents said they can’t remember an election with two more different contenders) and I think it will likely not be the last. There will always be something – an event or crisis that arises – that will make investors feel like they should trust their savings accounts more than the markets. However, as long as they stick to their financial goals, have a diversified portfolio and understand their risk tolerance, investing is the best way for individuals and families to grow their wealth and ensure their financial futures.

Set a (Global) Context

While the political and regulatory climate may warm and cool over time, changes during any one presidential administration are typically at the margin. The people, institutions and practices that make our economy strong remain in place and, by-and-large, are able to continue their good work

Another important exercise for easing clients’ concerns about the election is having them view the U.S. in a global context.

We live in a globalized world. And even though it’s in a different state than ever before and media is hyper-focused on issues and challenges, this country has, and will continue to have, one of the world’s great economies. While Investor Watch found that 68% of wealthy American investors believe that we have lost our “edge,” the U.S. still leads the world in innovation and economic competitiveness , which I believe, makes us one of the best bets investors can make.

Though China is gaining in technology and trade, and India’s population is growing exponentially, I believe the U.S.’s position as a dominant global power can be sustained. I’m optimistic about the country relative to the rest of the world, and the victory of one Presidential candidate or another is not going to sink our economy or, for that matter, automatically propel it to new heights.

Whomever our next President is, the U.S. will still be home to many of the world’s best and most creative minds in business, academia and research (FYI, we have won more Nobel prizes across all science categories than any other country since World War II ). Our economic, financial and capital markets structure encourages entrepreneurialism and provides an infrastructure and range of opportunities to get ahead that is unmatched in the world. We have longstanding, pro-business policies in place and established global leaders in a wide range of industries along with millions of small and mid-sized businesses that drive much of the wealth creation in the U.S.

While the political and regulatory climate may warm and cool over time, changes during any one presidential administration are typically at the margin. The people, institutions and practices that make our economy strong remain in place and, by-and-large, are able to continue their good work. Understanding what creates our place in the world economic order is key to both helping clients comprehend the significance of an election in relation to their investments and opportunities, and to sustaining their faith in our economy and markets for the long-term.

Embrace Change

According to UBS’s Investor Watch, 74% of investors are worried about the election’s outcome regardless of who wins, and 57% believe it’s harder for Americans to rise up from humble beginnings now than it was in previous generations. That’s a lot of anxiety. In my view, much of this nervousness is driven by election uncertainty and the rhetoric of extreme candidates on either side of the aisle who are campaigning for dramatic reform.

Many American voters are clamoring for change, just as they did the last time we had an election without an incumbent running in 2008 . Of course, as it is our privilege to do in the U.S., we disagree (typically strongly and along party lines) about what types of change will be most effective in addressing the challenges we face – should we balance the budget? Lower taxes for one group or another? Increase the minimum wage? Enforce or change immigration laws?

But in their quest for specific, quick solutions to the most visible challenges of the day, I think many voters and investors fail to appreciate the bigger picture: America has proven resilient and able to adapt to the world as it changes. Over the centuries, the U.S. has evolved from an agricultural to an industrial to a technological society, adapted to improved modes of transportation and communication, and competed successfully through a sustained period of globalization and the emergence of many strong economic and political powers. Though there are periods of adjustment, the U.S. has always found a way to make it work and stay on top.

So, while this election (and the compounding effect of troubling world events), may put us in unchartered territory and cause concerns about the future among our clients, I don’t believe it should. The foundations of our economy and country are strong and our resources are vast. Because of that, I believe that if investors set and stay focused on long-term financial goals, create portfolios aligned to those objectives, and hold their course through periods of volatility, our economy and markets will likely reward their patience and perseverance. ◊

 

 

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With over 15 years’ experience in private wealth management; Michael joined UBS Private Wealth Management in 2003 from Goldman Sachs’ Private Wealth division, where he developed his vast knowledge and training addressing the needs of ultra-high net worth clients.
The views expressed herein are those of the author and may not necessarily reflect the views of UBS Financial Services Inc. In providing wealth management services to clients, we offer both investment advisory and brokerage services which are separate and distinct and differ in material ways. For information, including the different laws and contracts that govern, visit ubs.com/workingwithus.