Business cycle lies outside realm of politicians

I do quite a bit of US travel. Last week I was in Colorado. Now I am writing from Sacramento. I always encourage questions from my audiences.

But something has changed in the last few months. Hostility to either the president, Barack Obama, or his rival, Mitt Romney, has risen to heated levels. In fact, sometimes this hostility has begun to push investment discussions off track. Political vitriol seems to infuse all questions, and comments about the markets are often misconstrued and twisted.

I have been wondering why this shift is happening and how it affects investment decisions. I think people have grown increasingly partisan. This has happened for a few reasons: The government now makes up 25% of the US budget. Throughout my career that percentage has hovered around 20%, never varying more than 1%. That means investors now have to consider politics 25% more than they used to because it's affecting our economy 25% more.

Additionally, the two major candidates seem to offer starkly contrasting approaches to the economy and its projected debt burden. Romney favors cutting entitlements and keeping tax revenue neutral, while Obama wants to maintain entitlement programs and raise taxes. Furthermore, more partisan media have added more fuel to the flames. All the forces together have inflamed passions beyond what I have seen in thirty years of investing.

The first thing I want to tell investors is to separate their role as an investor from their role as a US citizen.

Running a society like that of the United States involves a mix of beliefs in what constitutes fairness, hopes for the future, and sensible self-interest. The extreme viewpoints on this mix often come out during elections, but they are of little value to investors and can only serve to cloud clear judgment.

Here are my recommendations for frustrated investors as the election approaches:

1. The power of politicians, even that of the US president, is limited. We should keep in mind that political power has very little to do with the mechanics behind the business cycle. The forces that shape expansions and recessions are embedded in human behavior: risk-taking, work, optimism, pessimism, etc. All of these forces play out over long periods of time and are well beyond the influence of any president or politician.
2. Politicians promise that the world or economy will be better if they are elected, but in reality the power of the president is limited by the US Constitution and the vast system of global trade which would render any economic promises untenable.
3. Don’t pay attention to promises made by either candidate to create jobs or boost growth. The market for goods and services will make adjustments on its own and price in any real changes made by the government.
4. Taxes make a difference, but no matter how tax laws are changed, people will find a way around these laws to make the system work. Investment decisions should always be made on their own merits, not based on tax effects.
5. Forget the dream speeches. This world is far too complex for any politicians to have the “right answer.”
6. The market looks ahead and ignores the promises; so should you.
7. Focus on corporate profit margins and corporate cash flow. The data are there for the asking.
8. The world will change and promises being made today will be obsolete tomorrow.
9. Don't listen to friends and neighbors who warn that if one or the other candidate is elected the markets will crash. I have been hearing that threat for more than 30 years and have never once seen a market crash because of an election.
10. Forget my investment advice on Election Day. It is then that you can put on your US citizen cap and decide who is the best candidate to lead the United States into the future. Then I would say to sit back and watch the results and on Wednesday take a look at your portfolio and ask yourself if market fundamentals support your investment decisions.

No forecasts can be guaranteed.

The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.

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