Political Perception and Your Investment Portfolio

I am a science fiction fan, and one TV show I have enjoyed throughout the years is Dr. Who, a British show with a long history. I remember one episode where aliens had built a secret base in a room in a girl’s house. She lived in the house, but never saw the room until our hero, The Doctor, pointed it out to her and then she saw it. I remember that he told her that she couldn’t see the door to the room because of a perception filter.

I think the concept of a perception filter is a great analogy to the current noisy frenzy happening in Washington and its supposed effect on the markets. If you are a Republican, President Trump is doing great things and the economy is poised to do well, with perhaps a few little blips. If you are a Democrat, all you hear about is chaos and doom and gloom, combined with tariffs and a trade war which will bring on an economic depression. Meanwhile the US stock market has gone down and lost all the “Trump Bump” which occurred after the election.

Is it Time to Panic?

So, which is it: the start of great things for America, or the start of the next depression? Will the stock market skyrocket or are we poised for an even bigger selloff?

I can’t really answer this question and neither can you, but I do think that we shouldn’t panic. What is happening with the stock market is very normal. As of today, the S&P 500 has dropped approximately 10% from peak to trough which meets the definition of a market correction. According to Kiplinger’s Magazine, since the 1950s the S&P 500 has dropped 10% or more 38 times. That is an average of 1.8 times per year. So, it’s very normal for market drops to occur. A drop of 20% or more is considered a bear market.

Figure 1: The S&P 500 index on a log scale since 1950 (https://www.macrotrends.net/2324/sp-500-historical-chart-data)

According to Investopedia there have been 11 bear markets since the 1950s. That averages out to a bear market every 7 years or so. It’s unpleasant to live through, but it is a normal part of investing. We have not entered a bear market now, and I am not suggesting that we will enter one at the near future. My point is that since 1950 despite 11 bear markets and 38 corrections the S&P 500 has risen 355,179% to the end of 2024 according to the website officialdata.org. That is an average of 11.52% per year. We lived through the Berlin Airlift, the Cuban Missile Crisis, the assassination of a US President, the Korean War, the Vietnam War, 9/11, and the COVID pandemic. What are a few tariffs?

Does that mean the S&P 500 will go up by the same amount in the next 75 years? That is not what I am saying and that may not happen. What I am saying is that these world events had very little long-term effect on the stock market and its unlikely the Trump Presidency will have a major long-term effect either. Good or bad.

How About the Economy

So now that I have removed your perception filter, let’s talk frankly about the economy and the markets. The US economy has been doing very well, and fourth quarter earnings were excellent. The first quarter is close to being over and I would expect decent results in this quarter too, although perhaps not quite like last quarter. Inflation is not at 2%, but this morning’s (3/12/25) CPI reading of 2.8% indicates that inflation is still moderating, at least looking immediately backwards. The last job report showed job openings increased by 151,000 in January. The unemployment rate was 4.1%. Yes, this was before the federal government dropped a lot of positions, but it shows the current strength in our economy.

But what about the tariffs you say. Yes, tariffs might affect the economy by raising prices, but it is not altogether clear by how much. The media keeps implying that a 25% tariff will increase the price by 25% raising inflation, but that may not be the final result. There are other external effects that may change things. The US dollar has been very strong and if it rises and the other currencies drop, then the actual effect of tariffs on prices get mitigated. At the same time, although the claim is that importers will pass along the entire cost of the tariff, I think that is unlikely. In a competitive market, at least some of the tariff will be absorbed, lowering profit, but reducing the effect on the consumer. I read the news this morning that Walmart is putting pressure on their Chinese suppliers to absorb the tariffs. They may not be fully successful, but they may be able to force their suppliers to absorb some of them. Still, tariffs will feed inflation, the question is just how much.

Tariffs may be inflationary, but by themselves the connection to a recession is unclear. Uncertainty is much worse for the economy and the chaos of on-again, off-again tariffs may be worse than just having tariffs. But we certainly aren’t seeing more than a few hints of a slowdown right now.

The Stock Market

But how about that stock market? I have pointed out in previous posts that the S&P 500 is very undiversified because the top 10 stocks were 38.4% of the index on December 31st. The index is very well priced and could be due for a fall. There has been lots of bad news for some of the top stocks recently including Chinese competition for Nvidia and a drop in Tesla sales. The tariff trauma may not be the cause of the market drop, but just the excuse. Meanwhile, the MSCI EAFE index of international stocks (a stock market index that measures the performance of large- and mid-cap companies across 21 developed market countries around the world, not including the US and Canada) is up 8.33% since the beginning of the year. The MSCI EM index of emerging markets is up 3.45%. Even the S&P 500 Equal Weight index which is not as affected by the largest stocks is only down 1.84%.

So, stop listening to all this terrible noise from the White House and from the media. A well-diversified portfolio with significant international exposure and a bond allocation is your best recipe for long-term success. The diversification significantly lowers the risk of investing. At the same time, it may make sense to hold on to some extra cash at this point. How much? I usually recommend that clients hold 3 to 6 months of spending in cash, but if you are living from your portfolio, maybe you want a year or two of cash or at least guaranteed income. As long as you have that security and your portfolio is well-diversified and adjusted for your risk tolerance, you should stay invested and think about 5, 10, 20, or even 30 years from now instead of being worried about the current situation. Historically, the only people who lost all their money were those who were not diversified and that sold when the market was down and never reinvested.

Don’t let your emotional reaction to your political perception invest for you.

This article contains my views and opinions, which are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.  Past performance shown is not indicative of future results, which could differ substantially.

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