Mixing Money and Politics: Market Timing During an Election Season

Paul Winkler: Welcome. This is “The Investor Coaching Show.” I am Paul Winkler, along with, today, Mr. Evan Barnard, hanging out.

He’s going to take two hours. I’m going to take one hour. Take two hours. He’s going to get two.

Evan Barnard: Hey, I’m a slow learner. I’m a slow learner. I get two hours.

PW: No. No, you get the better stuff in the second hour. You’re going to just get B team first hour here.

We’re going to be talking finance and money. We got Jeff behind the board along with Brian. We’re going to have a big time here. We’ve got a party in here.

EB: That’s a lot to talk about.

PW: What’s that?

EB: It’s a party in here.

Market Edging Down

PW: Hey, we got a lot to talk about. I mean, you’ve got Israel and Iran, you’ve got the stock market edging down and people going, “Well, why did the market edge down?” You know what the interesting reason is that they said that the market edged down?

EB: No.

PW: It’s their concern that you could have a Republican sweep. Okay, so a lot of people, your heads are exploding. You’re going, “Wait a minute, get the duct tape out. What are you talking about?”

Remember back eight years ago? I remember being on WTN. We had a night out. It was at, oh gosh, it was in Cool Springs, I think it was.

EB: It was a wings place in Franklin.

PW: It was a wings place, yeah. It’s closed down now. But yeah, it was there, and it had nothing to do with the election.

EB: It was a Republican sweep. Close the place down.

PW: No, no, it really had nothing to do with us. Phil Valentine was still around here. Michael DelGiorno, we had Dan Mandis, and they’re all going, “Paul, get up here on stage,” because Trump was —

EB: Behind.

PW: It looked like he was coming back and winning. And then the stock market had dropped down significantly, but nobody knew who was going to win.

I made the point, I said, “Here’s how markets work.” And it applies even now. And I think it bears repeating.

Let’s say that you find that there’s little risk in the stock market and you’re going, “You know what? I think I know what’s going to happen. Everything. I know exactly what everybody’s going to do.”

Then there’s little risk. When there’s little risk, there’s little return. So, they go together. Risk and return are very related. 

If I believe that I know exactly what’s going to happen and I’m not at all unsure about the outcome of something, I will pay more for something. So, if we’re looking at stocks and we say, I’m going to pay $20 for every — and this is the example I gave on the radio — dollar of earnings, I flip that over, I get a dollar of earnings for each 20, one divided by 20 is 5%. My earnings yield is very low.

If on the other hand, I am more concerned about the outcome of something and I don’t know what’s going to happen, I’ll pay a lower price. I’ll go to $10 is what I’ll pay for those dollars of earnings. So, it’ll go from 20 down to 10, and one divided by 10 is 10%, and then my earnings yield is higher in that instance because of the fact that I’m going, “I don’t know what’s going to happen.”

The Election’s Effect on Markets

PW: I think that’s what goes on during elections. Especially eight years ago, nobody really knew who was winning. And it was like people thought they knew who was going to win because Hillary was ahead.

EB: Yeah, frankly, as I recall, I think at this point, I think the thought was that Hillary was going to win.

PW: Right. And then what happened is when it turned out that Trump had won, markets went up a little bit, but they really, really went up. And a lot of people forget this. They really went up on that Thursday.

So, of course, the election day was Tuesday. It was Thursday that the markets really shot up, especially small caps. And you go, “Well, why was it that markets jumped up so much a couple of days later?”

I have a theory that once Trump started making speeches and started talking in public and people determined that he wasn’t nuts, that he was fairly rational in what he was talking about doing, it was this feeling. Okay, it was this: People weren’t worried about as much anymore. And I think that if you look at, when you’re saying, “Hey, I’m worried about a Republican sweep,” and you hear people saying investors are worried about that.

They’re thinking, Oh my gosh, they’re just going to go crazy. They’re going to do whatever they want if they have a sweep. And I don’t believe it. There are a lot of things that are on the table, I don’t think that would pass muster necessarily that they’re proposing doing. Even if you had a Republican House and Senate and presidency, and simply because there are a lot of things getting out.

I hear rumors. We’re going to do away completely with the income tax.

EB: Or the Department of Education or whatever.

PW: Yeah. You hear this kind of stuff, and you know what?

There’s a lot of talk, and you can say that people will do what they say they’re going to do, but you’ll still have gridlock in Washington.

And that’s a good thing. Go slow.

EB: Until there are no lobbyists, it almost isn’t going to matter who wins the election.

PW: Yeah. They go slow.

Predicting Markets Around the Election

EB: Thinking about the rebound, and in general, and spoiler alert, I’ll probably talk some about election stuff in the second hour, but at the time, and it was the 2016 election, it was the first time I had voted absentee. Because I am one of those Election Day people, although Cindy and I voted on Tuesday this past week.

PW: Yeah, I did too. Not Tuesday, but Friday.

EB: We got it done. But we were going to be out of the country in 2016 on election day. We were actually going on a cruise through the Panama Canal.

PW: Oh, wow.

EB: And so it was Tuesday when we boarded the boat. Here was this festive thing, and you’d have kind of thought everybody was going to a funeral.

It was a real quiet line, and everybody was just kind of getting their luggage and getting onto the ship and you go to dinner and it was just kind of subdued. And then they played the election results in the theater in the back of the fantail, back of the boat, whatever, and the state would be called, and they played the BBC coverage, which was excellent.

PW: Oh, interesting. They are super, super tuned in on our elections.

EB: It was a good analysis. It wasn’t a lot of vitriol. It really was fun to watch.

PW: Yeah, they really are over there.

EB: And so then I ended up going to bed. Cindy stayed up and was watching the TV in the cabin, and it was declared, I don’t know, at 2:00 in the morning as far as ship time or something.

PW: Yeah, I was out, yeah, yeah, yeah, for sure.

EB: And the mood on the boat that morning and the rest of the cruise was just Care Bears and Rainbows, kind of the whole thing. It was such a mood change that Trump had won.

And we were talking about it. It’s like, well, you kind of have to picture who’s going to be on a ship in the first week in November that can take a week off.

PW: That’s right.

EB: It’s not Fall break, it’s not Christmas. And it was really interesting.

But as I recall, one of the reasons Thursday shot up so much was the futures market was heading down as it looked like he was going to be winning or something. The market was headed down on Wednesday.

PW: That’s right. That’s correct. Well, Tuesday. Tuesday night.

EB: Tuesday night.

PW: Yeah, that’s right. That’s exactly right.

EB: All of a sudden, instead of whatever, losing 500 points, we gained a couple hundred or something.

But yeah, you don’t want to get in the business of predicting the market tied to an election.

PW: And that’s exactly the point. I was teaching a workshop for Jonathan this past week, and a lot of the conversation was about, they were talking about, it was exchange rates we got into.

Currencies Meeting in Russia

We got into currencies because remember, they were having that meeting in Russia, and then one of the things that came up — so they were having this meeting in Russia with all these different nations, and the whole idea was, are we going to go against the Petrodollar? Are we going to abandon the dollar? Are we going to go to different currencies?

And the question was, “Hey, Paul, what do you think about this?” And I said, “Well, what’s super, super interesting about the meeting, if you really paid attention, none of these people trusted each other.” I mean, it was literally, you could cut through the distrust for money.

EB: For good reason probably.

PW: And it was India, and it was a big pressure, big pressure on Russia to end the war. And I think that a big part of that, from what I had read and what I surmise, is that people are concerned that, hey, look, we can’t trust any of these other countries.

Yuan, forget it. We’re not going to put that as a reserve currency because you can’t trust China as far as you can throw them. You can’t trust Russia as far as you can throw them. You can’t trust any of these countries that were coming together.

And India was one of them, and they were going, “Hey, wait a minute. Can you guys, let’s kind of slow down on this war thing.” And one of the things I said in the workshop, is I said, “You guys may look at this and go, ‘This is a conspiracy against the United States,’ and people could really go that direction.”

I said, “But if you’re a rational person, let’s say, you’re looking at this and saying, ‘Well, why are they doing this?’” And I think it’s just to make themselves somewhat immune from sanctions. That was really it.

Because they’re looking at it and going, “How can we protect ourselves from maybe the U.S. putting sanctions on us and controlling us?” 

So, that’s really why they’re doing it. But the interesting thing is nobody trusts each other.

So what they’re wanting to do is just say, “Hey, can we come up with a solution and can we just basically back off of the wars and can we actually back off of some of the conflict so that the sanctions aren’t necessary in the first place?” And I think that was the interesting thing that I was noticing, and who knows how it’s going to turn out, but you just can’t predict this stuff, as we said.

Life Finds a Way

PW: Then looking at what has been happening in terms of markets in general, a lot of it’s just, it’s been all over the place. And because you hear people like Mark Cuban coming out and he’s going for Harris. He’s a business guy, and he’s for Harris.

And what’s so funny about this is he’s out there telling everybody, “There’s no way that she’s going to have these tax proposals. There’s no way that she’s going to put forth any of these tax proposals, she’s not going to do it. She’s not going to have this tax on wealth.”

EB: Unrealized gain.

PW: It wasn’t the unrealized gain, it was the wealth tax was basically what he was saying. And the Harris campaign’s coming out and going, “No, we are.”

And you just go, “No, no, wait a minute.” But then even that, you look at that and say, “Will that even pass muster? Will that get anywhere?”

Even if that were the case. And you look at a divided Congress — and a lot of people are just like, “I would love that” — there’s divided leadership in the country.

But even if you have a unanimous across the board, you will still have divisions because it’s going to be close enough and there are enough people that are going, “Yeah, I’m not so sure that I would like to see a complete abolishment of the income tax in favor of tariffs.” So, you have a lot of that kind of thing.

So, a lot of things that we worry about, let’s just take a page from the world of psychology. A lot of things we worry about don’t ever actually come to fruition. The vast majority of things that we worry about.

EB: Go to the internet, Google the Serenity Prayer, print it out, and put it on your refrigerator.

PW: Oh yeah, yeah, yeah. Yeah.

EB: Put it over your coffee pot.

PW: Yeah, so good. I mean, really, really, it’s just like you look at the things that we sit around and we just fret about and we worry about. And somehow, as we like to quote Jurassic Park, “Life finds a way.”

The markets find a way, and companies find a way through whatever is handed.

EB: And taxes will find a way. They may change something, but the government’s going to find a way to get in your pocket somehow.

PW: Well, yeah.

EB: Just, it’s going to happen.

PW: For sure.

Not Worrying About the Market

Of course, what’s going to happen is that companies, if let’s say that profitability starts to suffer, then they’re going to be laying off people, and then politicians don’t do well when you lay off a lot of people.

When you have high unemployment rates, people don’t get reelected. And that just is the reality of the situation.

So, the things that we worry about, recognize, I think that more than anything I sit back with, it was kind of like when I was on Channel 5 a couple of weeks ago — a week and a half ago, I guess it was. I was on there and we were just talking, and he goes, “You’re so calming.” He said, “Was there ever a time that you can think of, was there ever a time that you were really worried about markets?”

EB: Oh, I could answer that.

PW: Well, I said, “Yeah, before I actually had education from an academic perspective, yeah, there was. There were lots of times I was worried about markets. But after that, once I understood them, no.”

EB: Right. That was my answer too, like, yeah, I can remember when I was worried about it 25 years ago.

PW: Well, and that’s exactly right.

It’s the more you understand it, the less you worry about it, because you start to recognize that markets and companies are just like you are. 

You will, if you lose your job, start looking for another job. If sales go down, they’ll start looking for something else that they can sell. You will, if you’ve lost your job temporarily, or let’s say you’re out of work for a temporary, and then all of a sudden you have expenses that are coming in, you’ll just reduce your expenses and a company’s going to do the same.

Now, there will be maybe a lag time before you can get this done, but you will do whatever you’ve got to do. That’s why markets go through their fluctuations, and they’re typically fairly short run, those downturns. So, I think that’s just critical to get into.

See, I was going to talk about something in the first segment. We never got to it.

Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.