How Much Impact Does The President Have On The Market?

The question of whether or not the U.S. President or a particular party has an impact–positively or negatively–on stocks, bonds, unemployment, inflation, the deficit, and GDP growth–has been flying around like crazy. But especially in the midst of a contentious election cycle, it’s never been harder to find clear answers.

But take a glance at this interactive chart that enables you to click on each U.S. President going all the way back to 1929 to see what the major market and economic indicators looked like for each presidential cycle. I think you’ll find that it’s conclusively inconclusive:

So, should you consider changing your investment plan ahead of the election?

Short answer: No.

And here’s the slightly longer answer from one of the brightest investment people I know (and a darn good guitar player), Jared Kizer, CFA, Chief Investment Officer, Buckingham Wealth Partners:

How Fantasy Ruins Football (and Investing)

Originally in ForbesIt’s that time of year again, where the heat of summer recedes, sweatshirts make a comeback and businesses lose billions in flagging productivity due to fantasy football. But it’s not just businesses losing out—fans and players come up short as well.

How, after all, can I truly dedicate myself to rooting fully for my beloved Baltimore Ravens if I took JuJu Smith-Schuster—who, for those not acquainted with the best rivalry in football, plays wide receiver for the Steelers? It can’t be done. It’s just wrong.

I’m kidding, right?

Partly. But there are more serious personal and financial implications to embracing fantasy (sports or otherwise). The danger in fantasy is its distance from reality. It’s “betting on a future that is not likely to happen,” according to Psychology Today.

Our fantasies tend to sensationalize what we’d prefer to imagine while ignoring what we’d prefer to not. Then, when our actual spouse, child, parent, friend, or co-worker falls short of the impossibly high bar we’ve set for them, we—and often, they—are crushed.

“Emotional suffering is created in the moment we don’t accept what is,” says Eckhart Tolle, who, perhaps unintentionally, delivers a potent dose of truth that especially informs us in our personal dealings with money.

Here are a handful of financial fantasies, followed by their unvarnished truths:

Why The Stock Market Is Volatile, Why Volatility Hurts, And What To Do About It

Unless you made a resolution not to read, listen to, or watch the news in 2020, you’ve likely noticed that “the market” is going crazy. Indeed, one glance at the headlines quickly reveals that the market is experiencing historic volatility—ups-and-downs, with more of the latter at the moment.

But an objective view of the market reminds us that on every trading day in history, there have been compelling cases to be made for both optimism and pessimism—for purchases or sales. (Remember that every single security transaction involves a buyer and a seller, each of whom believes he or she is getting the better end of the deal.)

Ultimately, there is only one sufficient answer to the question, “Why is the market so volatile?”

The market exhibits volatility because that is its nature.

What the #@$% is going on?

Unless you live under a rock (check out this Geico commercial referencing under-rock living if you haven’t seen it), you have picked up the message that volatile markets and bumbling economies have again captured the global consciousness.  If you looked at the headlines any of the last several days, you may very well have concluded that the sky is falling and the financial crisis of 2008 is returning.  A great article in the Wall Street Journal explained “Why This Crisis Differs From the 2008 Version,” but that still leaves us with the nagging question, “What the #@$% IS going on?”  (I’m not promoting profanity, only acknowledging that times like these have a tendency to inspire it.)

Strangely, the majority of the talking heads on television render their contrary opinions on what’s going to happen in the future—tomorrow, next week or next month—spending very little time educating us on what the underlying reasons are for our current crisis.  In the spirit of the Freakonomics team, who, in a recent podcast demonstrated “Why we are so bad at predicting the future,” I’ll avoid attempts at prognostication and seek instead to explain what IS and what ISN’T going on in the global economy at present, followed by a couple suggested action steps:

Debt ceiling?  S&P downgrade?

The big news of the last few weeks has been debate over the debt ceiling and the seemingly corresponding S&P downgrade of the United States government.  The market has been expecting this downgrade, regardless of what happened with the debt ceiling, for quite some time now—it wasn’t a surprise.  Besides, S&P’s ineptitude regarding the accuracy of their ratings, most notably demonstrated by their maintenance of top ratings on the junk that helped cause our financial collapse in 2008, has justifiably rendered their guidance nearly impotent.  It was suggested that if the debt ceiling was not raised, the U.S. would not be able to pay its bills for the first time in history and that could lead to a financial collapse.  Well, the debt ceiling WAS lifted, but the market responded by crashing.  How do we explain that?  The problem we’re experiencing now has little to do with the debt ceiling, but a lot to do with debt, in general.

So what is happening?

The U.S. certainly has its own debt problems to contend with, but while the U.S. media got narcissistically wrapped up in our own debt ceiling and S&P downgrade, it obscured the more imminent problem—major European countries threatening default.  We’ve all heard about the financial troubles of Greece, Ireland and Iceland—each of which required financial assistance to stay afloat—but following those three countries are Italy and Spain.  They’re much bigger economies, and their failure may not be sustained by the European Union (EU) and the International Monetary Fund (IMF).  And just within the last couple days, one of the stronger European countries’ banks, France, is sending warning signs pointing to another potential crisis there.

Deja vu?  (Not really)

In the Great Depression, we basically allowed the natural free-market system to run its course.  That resulted in the pain of 25% unemployment and a stock market decline of over 90%. The silver lining, however, was that after the economy recovered from its sickness, we got back on the path towards financial health and prosperity.  This time around, the government took unprecedented action to keep us from experiencing Depression-like immediate pain, but many suggest they just deferred the problem and that we’ll be dealing with it for many years into the future.

So the United States and other countries around the world started “printing money” to create growth in their economies, in the hope that increased money supply would pull us out of a recession headed towards depression.  But while it can’t (yet) be said that the U.S. is again dipping back into a recession (the dreaded “double dip”), some major European countries are headed quickly in that direction, and that contagion could spread around the world.  Again.  Governments have already started responded with measures similar to those utilized in the 2008/2009 financial crisis; doing whatever they can to create monetary liquidity they hope will spur growth.  This could result in a boost for economies and markets in the coming weeks and months, but it’s certainly no guarantee.

So, what can you do?

You shouldn’t make wholesale buying or selling decisions in your investments based on what a market does in a day or a week, but this current calamity should prompt you to return to your portfolio and take a long, hard look at what you own and why.  Whether you are a strict buy-and-hold asset allocator or an active investor, your strategy must recognize and contend with the possibility of times like these.  You—and your financial advisor—must be accountable to articulate why you own what you own and how you intend to react depending on further developments in this scary story.  I’m not recommending you buy, sell or “stay the course;” I’m recommending you educate yourself and then act accordingly, not out of impulse.  There is no bliss in ignorance.

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Inside “The Inside Job”

Inside-job-202x300 If you decide not to take my advice and watch the movie, The Inside Job, here is the primary takeaway I want you to understand:

The financial services industry is not in business for your benefit, but instead, its own.

You may recall that I reviewed Michael Lewis’s book, The Big Short, in January of 2011.  That book was an insider’s view of the financial collapse.  It tells the story of the collapse in lurid (and often vulgar) detail from the inside out.  The Inside Job (ironically) is actually a retelling of the financial collapse narrative from an outsider’s perspective, with the benefit of hindsight and complete with a catchy soundtrack and the cool-factor of Matt Damon as its narrator.  It begins with the following quote: “The global economic crisis of 2008 cost tens of millions of people their savings, their jobs, and their homes.  This is how it happened."

And if it stuck merely to “how it happened,” I could’ve given it the highest marks possible.  But instead the writer and director, Charles Ferguson, chose to proffer, directly and through a great deal of implication, his thesis on how the crisis could’ve been avoided (through more and better regulation).  That gave the film a less objective journalistic feel, but didn’t cost it its two-thumbs-up rating from me (I’m sure they were relieved), nor did it stop it from winning the Academy Award for Best Documentary in 2010.

The film surprised me with a preamble set not in the struggling U.S. heartland or on battered Wall Street, but instead in Iceland.  The story of Iceland’s economic demise—almost a microcosm of ours but in a country too small to bail itself out—is fascinating and the sweeping Icelandic landscape accompanying the story made me want to visit.  Then, the story of the movie is told in five parts:

  1. How We Got Here
  2. The Bubble (2001-2007)
  3. The Crisis
  4. Accountability
  5. Where Are We Now?

As opposed to a play-by-play, here are a few tantalizing tidbits that grabbed my attention:

Investment banks—the companies that raise money to birth new companies—used to be partnerships, not publicly traded.  This is noteworthy because when the banks were private partnerships, it was the partners themselves who risked their own capital.  If the companies they brought to life failed, it was their own funds that were lost.  The conversion to public companies—initially spurned by most of the establishment firms—meant, among other things, that investment bankers could make more money and spread the risk of each transaction to shareholders instead of bearing it themselves.  Eventually, each of the major investment banking firms went public.

The last major investment firm to do so was Goldman Sachs.  Goldman is so demonized in The Inside Job that I was expecting Lucifer himself to be indicted as its CEO, but while it feels at times like you’re watching a conspiracy theory aimed specifically at Wall Street’s most venerable member, it’s hard to argue in Goldman’s favor.  It is uncanny how many Goldman big-wigs ended up in senior government positions making decisions that materially impacted their fortunes and those of their cronies.  Don’t forget, “Hank” Paulson, the U.S. Treasury Secretary during the financial collapse, was the former Chairman and CEO of Goldman Sachs.  Should we be surprised that his fierce competitors, Bear Stearns and Lehman Brothers, were left to die on the vine while Goldman (which also played a material role in causing the crisis) emerged almost unscathed?

Unscathed, that is, but for their public image.  The movie details the congressional hearing with Goldman execs where they were forced to hear emailed quotes of their salesmen writing “Boy, that Timberwolf was one shi**y deal,” followed by confirmation of a manager (at a later date) prodding his salespeople, “The top priority is Timberwolf.”  (Watch them squirm under questioning in the video clip below.)  It’s scenes like these throughout the movie that will provide you with more pure entertainment value than you may have expected.

But I assure you this is far more than entertainment.  With the aid of visuals, The Inside Job does a very effective job of educating the viewer on the dramatic shift in the banking industry, detailed in-depth in The Big Short, from banks lending money directly to homeowners to banks lending to homeowners, then selling the loans to investment banks who sold the loans to investors who then purchased insurance created by the investment banks to cover their bets on poor quality investments that were rated high-quality by the rating agencies who were paid by the investment banks.  (See, it needs a visual.)

And despite its obvious left-of-center lean, it’s almost as condemning of Clinton and Obama as it is of the Bushes and Reagan.  While “W” takes the most presidential heat throughout the film, Obama’s criticism may be the harshest—after all, he employed many of the same exact people as the previous administrations in his highest economic posts, all on a platform of “Change.”  But I recommend you try not to get too hung up on the politics or obvious biases of the film.  It does too good of a job educating and exposing to dismiss it completely for bias.

The Inside Job is PG-13, but tame enough for a great educational piece for teens.  It will certainly become part of my curriculum (in addition to the movie I.O.U.S.A.) at Towson University.

It is not my desire to promote paranoia or incite bitterness and hatred toward the financial industry, but your future financial decisions will be better informed when you recognize that most of those clamoring for your brokerage, banking and insurance business are following policies purposefully designed to enhance their corporate bottom-lines, not yours.

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