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Investing in a Politically Uncertain World

U.S. White House in Washington DC

Presidential election years can make investors anxious – and this year’s unusual campaigns are no exception. In addition, political uncertainty is rising in the rest of the world right now. After years of modest economic growth and concerns about the future, many voters seem to be opposing traditional policies and supporting outsiders.

In the U.S., the level of political uncertainty seems to be similar to past elections with minimal impact on financial markets, despite the perception that the candidates are different this time. Abroad, the United Kingdom voted to exit the European Union (EU), increasing the uncertainty about its future role in Europe and the world.

When political uncertainty is resolved relatively quickly, people react, adjust and move forward regardless of the outcome. The U.S. election, the drop in global stocks in response to the U.K. vote and other elections may offer opportunities for investors. Don’t let the short-term uncertainty lead you to make decisions that could negatively affect you in the long term.

The 2016 U.S. Election

It looks like the Democrats will nominate Hillary Clinton and the Republicans will select Donald Trump. Investors who are worried about one or both of the candidates should remember:

  • Many current policy proposals won’t become laws. In many cases, candidates emphasize policies that couldn’t be accomplished in the form proposed. That’s why we think companies and the financial markets pay little attention.
  • Checks and balances in Washington tend to limit policy moves. And regardless of who wins the presidency, it’s likely that we continue to have divided government. That suggests changes are likely to be incremental, similar to the past.
  • Economic growth has continued under every political combination in the past.1 That’s why we think the economy matters more than politics. The pace differs depending on the party in power, but over time, we believe economic growth supports rising stock prices.
  • Stocks have risen under every past political combination.1 While there are differences in how stocks perform, the main drivers of economic and earnings growth have been positive, helping the stock market increase.

Britain votes to exit the EU

Investors reacted with shock when Britain voted to exit the EU, especially since recent polls had shown a majority for “remain.” The British pound declined sharply, global stocks dropped, and bond prices rose (lowering interest rates).

In addition to uncertainty about Britain’s trade relationships, the vote increases the chances that other countries follow with exit votes of their own. And there are many political uncertainties across Europe due to concerns about slow economic growth, high unemployment, refugees and terrorism.

Keep in mind these key points about “Brexit”:

  • No one knows exactly what happens after Britain’s vote to exit the EU. The U.K. doesn’t “exit” immediately. The details of Britain’s future relationship with the EU will likely be negotiated over at least two years and might not look all that different. The catastrophic predictions from those who favored a “stay” vote aren’t likely. But the uncertainty is likely to reduce economic growth as companies and consumers wait for clarity. In particular, the “exit” vote doesn’t mean the end of the EU or the eurozone. But it is significant for the future of the EU, since Britain is one of its largest members.
  • International stock investments remain attractive. While the U.K. is about 4% of the global economy, 12% of the global stock market and is experiencing heightened uncertainty, we still believe that investing internationally represents an opportunity to consider. With European economic growth improving and China’s economy showing signs of stabilizing, make sure you have an appropriate amount invested in international stock investments. Don’t let the  headlines keep you out of attractive investments.

A brighter long-term outlook

In our view, the fundamentals matter more than any campaign controversies. That’s why we recommend the following actions:

  1. Make sure you have an appropriate mix of stocks and bonds based on your comfort with risk and your long-term financial goals.
  2. Use the opportunity to add international stock investments, if appropriate for your situation.2
  3. Remember the nature of politics is to highlight what’s wrong, not what’s going right.

Don’t let politics derail your long-term strategy toward your financial goals. Prospects in the U.S. and abroad are much brighter than you may think.

Important information:

1 Source: Ned Davis Research, 3/4/1901–12/14/2015. Stock returns are represented by the Dow Jones Industrial Average. Past performance is not a guarantee of future economic growth or how the market will behave in the future.

2 Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

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