Pressure Cooking
The United States concluded its 60th quadrennial presidential election, electing a Republican as the nation's next commander and chief and 47th President to serve in the White House. In addition, the election results turned the US Senate over to the Republicans after four years of Democrat control. With another layer of uncertainty related to elections removed from markets, market prices are adjusting to the anticipated policies of the new administration.
Before the election, financial assets broadly lost value in October, with mild losses observed in categories such as equities and bonds. Moreover, physical market-linked returns in broad commodities and precious metals improved, possibly because investors diversified away from certain categories of monetary risks before America elected its new political leaders. However, the election results seemed to uncork certain areas of financial markets, which has set November off on a better trajectory than October in terms of general stock market performance.
Now may be a suitable time for investors to broaden their portfolios to include other important segments of the market that receive less attention, given the current degree of market concentrations in US large-cap stock indexes and changes in the political environment. One area that investors might consider is the relatively cheaper, compared to US large-caps, US small-cap market index. Small caps have underperformed large caps for many years and in many geographies. With greater sector weights to financials, industrials, and energy, this market index may appear like an attractive diversifier in investor portfolios and a hedge against any future monopoly breakups or anti-trust law enforcement against extremely large corporations domiciled in the United States.
The national conversation about regulating big tech and breaking up monopolies may gradually evolve over the next few years in ways that raise awareness and openness to new and emerging technologies in the United States. Specifically, President-elect Trump hyped digital assets on the campaign trail, explaining that he hoped to see America become a global leader in crypto. That seems like a remarkable change in public sentiment over a fairly short window while investors continue to receive greater access to cryptocurrency technologies as entry barriers fall. However, investors need to remain aware of the extreme risks and volatility of uncharted technologies and loosely regulated markets, which prevents many investors from gaining sufficient confidence in using this exposure on a broad basis.
Independent of any political biases, the short-term response of certain financial markets to the post-election results appears impressive. However, this is when investors should remain vigilant of the many financial risks that lurk and improve portfolio diversification. This is especially true for investors that have become increasingly concentrated in certain assets, investments or market exposures due to strong performance over the recent past. In addition, geopolitical risks connected to wars and potentially increased trade tariffs may lead to additional inflation, which may impact asset returns and serve as other key reasons to consider broader portfolio diversification.
Regardless of the party in office, the country’s leadership has a series of challenges to address, including massive fiscal deficits, trade deficits, and mounting public debt. Concerning financial deficits and debt, both can be extremely inflationary. As a result, investors widely accept that gold prices and government yields have significantly increased lately because of a worry that inflation could return or growth could slow, which may cause the federal government to respond with even larger account deficits.
Hopefully, Americans stand united through this election season and strive to work together to solve tough problems and create a better country for its current and future generations. For better or worse, the next four years will likely look fairly different under the newly elected leadership, which will surely impact investors. Although for some, it may feel like broad-based portfolio changes are necessary, it is important to remain focused on your specific risk tolerance and financial objectives when considering investment changes. Discipline, diversification, and commitment to your financial plan are important considerations for investors, especially during these times.
