The worst atmosphere for financial markets is one of uncertainty. As long as people can make reasonable estimates about the future, they’re going to make money. When they can’t make those reasonable estimates, they get skittish about investing and look for situations they can predict. Elections, especially contentious ones, are not great for markets for that reason.[/dropcap]
To see the reasoning for this, think like an investor. One of the determenents of how much money a company makes is how much they have to pay in taxes. That’s a predictable cost most of the time. Materials may change in price, salaries may fluctuate, but taxes are a fact of life.
Consider how different the world of corporate taxes would be under Clinton and Trump. Regardless of personal opinion about the tax plans the two candidates have to offer, they present radically different financial futures. That difference creates more uncertainty, which causes investors to hedge their positions, generally driving prices of securities down.
It’s not just corporate taxes that make the difference. It’s also the difference in spending on government programs. Choosing between a healthcare-oriented fund and a defense-oriented fund without knowledge of which will be the bigger government priority for the next four years is a big gamble. It’s a gamble that investors are generally unwilling to take.
The same is true in traditionally safe investments like treasury notes. The President gets to appoint the Chairman of the Federal Reserve and the Secretary of Treasury, and these people’s ideological perspectives make a great deal of difference in the kinds of investments that will be worth making. A candidate resolving to cut taxes while not changing spending would lead to significant inflation, which would make dollar-backed securities worth far less. Candidates who appoint financial leaders who raise interest rates will make those same securities a far more valuable commodity.
Making decisions without a realistic vision of the future is not investing. It’s gambling. Sure, the possibility of rewards makes it tempting to place such a wager, but investing is about prudent asset management. It’s about ensuring the survival of assets, not about chasing fantastic wealth at the expense of the future.
Free and fair elections do ensure a government by the people and for the people. They do so, though, in a very long, drawn out process that creates a great deal of uncertainty. That uncertainty is toxic to markets. It’s best to look to extraordinarily safe investments like real estate, commodities, and other real economic products until things settle down a little bit.