America is a special place. As a country, we used to understand that. It is not special because we are from here; it is special because it is truly different from the rest of the world. One act, by one extraordinary man, made America different. George Washington led a bunch of colonists against the world’s preeminent military power and somehow won. After victory, the people of America did what people around the globe have done since the beginning of human history: They went to their leader and asked him to be their king. But, George Washington did what no other leader, of which I am aware, in all human history did: He said no.
Washington said that we didn’t need a king, and the American system of democracy was born. That one act makes us unique. It is not the only thing that makes us unique, but it may be the most important. We do not, have nor have we ever, had a monarch. We have a system of checks and balances made up of three separate but equal branches of government.
I believe we could use that reminder as we head to the polls. Friday on CNBC there was commentary about the economic ramifications of both major presidential candidates. One commentator asked what would happen if Trump wins and decides to shut down the Federal Reserve. One simply cannot make this up – this was not some “person on the street” clip where they make fun of the ignorance of the average bystander. These were the professional market pundits to whom investors listen every day. The Federal Reserve was brought into existence through an act of Congress. The president of the United States does not have the authority to abolish an act of Congress. Every American citizen who had a passing grade in 8th grade civics should know this. However, the college-educated broadcasters on CNBC seemed to be completely unaware.
People, frankly including myself, seem distressed about this election more so than any election in my lifetime. We have heard from many clients who are concerned about what will happen in the capital markets after the election. While I understand and share the unease with the two major candidates, when it comes to what will happen in the markets after Election Day there are three things to keep in mind.
First, we must remember our civics lessons. We are voting for the president, not the monarch. We are also voting for Congress and the Senate and state and local politicians. We may be voting for local ballot initiatives. We are voting for all of government, and our government is mostly decentralized. The two presidential candidates cannot do most of what they have promised to do without the consent of Congress. Donald Trump cannot shut down the Fed or ignore existing trade deals, and Hillary Clinton cannot raise taxes on anyone. Congress holds the power.
Second, while outside events can have temporary impacts on markets, ultimately we are investing in companies. Apple will continue selling iPhones regardless of who is in the White House. People will still drink Cokes and watch TV and go to the grocery store. Prudent investing is done from the bottom-up, so what matters is what is happening at specific companies. There may be some companies that are impacted by policy, but that always happens, and there are usually just as many winners as losers.
The market does have expectations. The market consensus belief is that Hilary will win and the Republicans will keep control of Congress. Mind you, this is not an indication of what Wall Street wants, it is simply what they believe will happen. The investment industry is a diverse industry, and like most industries it employs people of differing political views. However, when it comes to our day jobs it is a matter of understanding probabilities. The highest probability is Hilary wins a close election and Congress remains in the hands of the Republicans. If something other than that happens then, like any surprise, the market will likely react. That reaction will be short-lived and a few days later we will be back focused on company earnings.
Third, we have already had the reaction. The “smart” money has been on hold for the month of October. The market has had a stealth correction with stocks going down, but on very light volume. This means that most large investors have been simply sitting on the sidelines and waiting. No one has a crystal ball, but our best estimate is that the worst-case scenario is that the big investors just stay on the sidelines. The most likely scenario is that these investors have developed two different playbooks depending on the outcome of the election, and they start buying based on those playbooks once the outcome is known.
This election has been unique from the beginning. It may have an impact on future policy and the direction of our country. It is important. They all are. However, the world will not end if your candidate doesn’t win. We have a lot of problems in our country. We always do. We also have a lot of positives and sometimes we seem to forget that.
The Chicago Cubs just won the World Series. The Wake Forest Demon Deacons just won their 6th football game this season and are going to go to a bowl game. Michael Smith, our Director of Research, and his wife Sara just had a healthy baby girl. Good things are happening every day. We’ll get through this election one way or the other.
Chuck Osborne, CFA