During the final stretch of the election season, investors are understandably on edge. November 8th, 2016, will mark the culmination of one of the most unconventional, unpredictable and contentious U.S. presidential elections in recent memory. For now, markets appear to be pricing in the status quo (Clinton Presidency, GOP-controlled Congress), but we don’t have to look much further back than Brexit for an example of a political process that wreaked havoc on financial markets.
Since Brexit in late June, market volatility has receded and global equity markets have grinded higher. That being said, the tide may be changing—after more than 40 consecutive trading days of the S&P 500 closing within a 1% range, the index declined 2.5% on September 9th. Certain asset classes that are trading at rich valuations and near all-time highs may not be well positioned to absorb a downside shock.
Aside from the potential for increased market volatility and headline risk associated with the upcoming election, we believe economic concerns are surfacing. The U.S. business cycle is getting long by historical standards. In its eighth year, the current economic expansion is nearly 2.5 years longer than the post-World War II average. Although accommodative monetary policy may have extended the length of the current cycle, real GDP growth of 0.8% in the first quarter and 1.4% in the second quarter of 2016 represents a declining trajectory compared to the 2% average growth since 2009.
Against this backdrop, investors should consider the following actions within the context of their broader investment plan:
- Increase cash and high quality fixed income
- Reduce equity and non-investment grade fixed income
- Overweight United States vs. rest-of-world
- Favor defensive sectors over cyclicality
At Matrix Wealth Partners, our ultimate goal is to ensure that the individuals and families we work with are on a path toward their long term objectives. At the same time, we are mindful of near term risks on the horizon and believe investors should assess the risk-reward profile in their portfolios considering the less appealing market conditions today.