The extraordinary developments of this year's election cycle have more than politicians and history buffs baffled — wealth managers are also uneasy over the potential repercussions.
Over half of advisers reported that the outcome of the upcoming U.S. presidential election will have a moderate to significant impact on their practice in the next year, according to a recent survey by Financial Planning, which polled 328 financial planners.
In particular, long-term macroeconomic effects caused by new trade policies and possible regulatory overhauls targeted at the financial services sector have advisers worried that doing business will become harder than ever.
"Everything the Obama administration put together may be changed," says Ben Emons, chief economist at Intellectus Partners.
"Everyone thinks that there will be big implications down the road with negative outcomes," says Paul Christopher, head global market strategist at Wells Fargo Investment Institute.
INVESTING ON SHAKY GROUNDS
With a new government comes a new set of rules. And with this election’s particular focus on income inequality, the high probability of significant regulatory changes is concerning to wealth managers and their clients, according to Ben Emons, chief economist and head of credit and portfolio management at Intellectus Partners, a RIA based in San Francisco.
"Everything the Obama administration put together may be changed. We are going into a new regime even if the president remains a Democrat. Some of them might be concerned about higher capital gains taxes, or other indirect taxes," Emons says.
Last week, Democratic Rep. Peter DeFazio introduced a new bill for a financial transaction tax aimed at curbing excessive speculation and speed traders on Wall Street, which the Party claims have "threatened financial markets," according to an official statement. If passed, the new legislation will levy a 0.03% tax on trades of stocks, bonds and derivatives.
The Department of Labor’s fiduciary rule is also set to go into effect in April, 2017, when a new president will be in office.
In addition to potential regulatory overhauls at home, the future of global trade is also worrisome to advisers, says Christopher. "They are afraid of a trade war and what will happen to the economy if there is one." Although that language has been clearer for Trump than Clinton, he says, the possibility exists no matter which becomes President.
Emons points out that the U.S. is not the only one facing a changing government. Pivotal elections will also take place next year in France and Germany, which could affect international assets.
“The political landscape in its entirety is changing. And that’s what markets are looking at,” Emons says.
For David Bahnsen, managing director and CIO of HighTower Advisors’ The Bahnsen Group, the particular sectors that will benefit or suffer from the two parties’ policy platforms are more concerning.
“Advisers care about the weeds. Each candidate has something they represent and the changes resulting from that will be important,” he says.
MARKETS DISLIKE UNKNOWNS
Compounding the threat of significant policy changes is the increasing unreliability of indicators like market movements and polls.
Compared to past elections, the market is having a particularly difficult time predicting the outcome, says Emons. It miscalculated the outcome of Brexit, he notes, which is a very rare event for markets to miss, and the same could be happening with the election.
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"Historically, if the market anticipates a Republican president it tends to be positive for stocks, whereas if a Democratic president is expected it seems to be positive for bonds. We are in a strange situation where both are doing quite well,” Emons says.
Christopher agrees. “For this particular election the market hasn’t made up its mind yet about who’s going to win.” He adds that the accuracy of polls is also slipping and turnout may be low due to the unfavorability ratings of both candidates, all of which adds to general market anxiety over the outcome.
The market may be better positioned if Donald Trump can display consistent maturity over policymaking and governing going forward, says Bahnsen, who reports that his politically conservative clients are especially nervous.
"The concern [from clients] is largely over if indeed Trump is going to win this, will he surround himself with respectable people, with experienced professionals? If he does, that will soothe the markets."
HOLDING STEADY
Although they have varying explanations for why and to what degree advisers are concerned about the election, Christopher, Emons and Bahnsen concur that it may be premature to adjust investment strategies and rebalance allocations.
"We want clients to very much focus on the mid to long term," Christopher says, adding that since April Wells Fargo has taken a selective approach, overweighting the cyclical large caps while simultaneously underweighting small caps and emerging market assets.
The firm’s strategists also anticipate that the most likely outcome of the election is another split government with a Democratic president and a Republican majority in Congress.
"We are not seeing anyone predict a full sweep like in 2008. It will be a divided government, and historically that's been favorable for the market," Christopher says.
Bahnsen says that he is advising clients to keep their eyes on the "bigger balls out there," such as potential Fed rate hikes, global negative interest rates and other shifts that could have a greater effect on markets.
"Right now the current story is pretty baked in – Hillary wins with the Republicans keeping the house. It will be business as usual," Bahnsen says.
