A Tale Of Two Markets?

by: Chris White, CFA

Summary

Our attitudes about investing are emotionally driven. The results of the recent presidential election proved that. But there are perils in basing one's market outlook on who's in the White House.

To survive and thrive in any market (regardless of the political party in power) it's important to understand one's emotional make-up as an investor, and to develop investment strategies accordingly.

Based on the kind of investor you are (Fixer, Survivor, or Protector) there are always market opportunities out there. The key: know yourself and keep fear and greed in check.

Ultimately, emotional self-awareness is key to making good investment decisions in any market, based on both personal values and beliefs as well as economic realities and market opportunity.

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness…."
- "A Tale of Two Cities" by Charles Dickens

Most of us are familiar with the memorable words I cite above, penned by Charles Dickens in the opening paragraph of his famous Victorian novel, A Tale of Two Cities.

In the year he published his famous 400-page opus (1859), Dickens was writing about life in London and Paris before and during the French Revolution.

Ironically, Dickens could have used the very same words to describe the U.S. stock market just after the 2016 presidential election. And, if he'd chosen to write about it, he might have titled his book, The Tale of Two Markets, or even, The Tale of Two Trumps!

Why?

Because for one group of Americans (those who identify as Republican) the unforeseen election of Donald Trump as president was greeted with enthusiasm (a "Trump bump") if not downright euphoria. For this right-leaning group, Trump's election represented a "best of times" scenario from an economic perspective.

That sentiment was borne out in figures released by the University of Michigan Surveys of Consumers in February which showed that, among Republicans, positive expectations for the economy under Trump were 120.1, a survey benchmark indicating overwhelming optimism about strong economic growth under the new Administration.

By contrast, the February Expectations Index among Democrats was only 55.5, a number that anticipated recession in the months and years ahead.

Clearly, for left-leaning consumers, the start of the Trump Administration signaled a "worst of times" scenario or something quite close to it.

Alternate Realities?

Fast forward a few months, and today's consumer sentiments about the economy (by political affiliation) remain largely the same, according to the University of Michigan Surveys of Consumers website.

Clearly, both viewpoints about our country's future economic prospects can't be correct, right? Or can they?

What do you think? Is the U.S. economic outlook under the Trump Administration as dire as some left-leaning consumers (and, by extension, investors) perceive? Alternatively, is it as rosy and hopeful as many right-leaning consumers and investors want to believe?

It begs the question: Where does economic reality reside and how can we, as investors and advisors, do a level-set, and make future investing choices based not on fear, greed, or politics but on the basis of reason, research, and logic?

Why Our Investing Decisions Should Never be Politically Driven

In recent months the financial press has been obsessed about what the Trump presidency, with all its palace intrigue and political and policy unknowns, augurs for investors and the U.S. economy. But to me this is not the right lens through which to assay the nation's economic outlook or to forecast the country's macro-economic performance over the next four years.

Nor do I think investors should try to pin their economic hopes and fears on what the Trump Administration does or doesn't do.

Here's why:

As we all know, for most people investing is a long-game; one that, to bear fruit and profit for any investor, typically entails their involvement in the market far beyond the lifespan (and political idiosyncrasies and machinations) of any one U.S. Administration.

Second, as we also know, despite our best efforts at effective market prognostication, the stock market persists as a quirky economic mechanism, driven as much by factors and currents we can pinpoint, understand, and explain as by factors we don't understand or control.

Third, investors are often highly emotional creatures. They can be steady or fickle, rational or illogical depending on their personal emotional make-up, and driven in their investment thinking by both conscious and unconscious emotional factors.

To this third point, I've been a wealth advisor for over 25 years and if there's one thing I've learned it's this: As investors we all live in two worlds. The first is a "low-stakes" world where the economic outlook seems calm and predictable and where we make investment choices based, at least in part, on reason and clear thinking. The second is a "high-stakes" world, characterized by market volatility or economic/political uncertainty where our emotions often prevail and sometimes cause us to make rash and ill advised investment decisions, especially when market conditions look particularly rosy or dark to us.

Fear and Greed Aren't Good Guideposts for Making Investing Decisions

Clearly, the election of Trump was a "high-stakes" event for much of America. It signaled hope for many, and fear for others. But using such momentary emotions as the basis of either one's consumer confidence or one's investing decisions is a perilous enterprise at best. Fear and greed aren't good guideposts by which to make investing decisions. After all, the stock market (like the weather) is very tough to predict over the long-term and "accurate" snapshots are often valid only for a moment.

So, what's an investor to do? And what about those advisors who work with them?

Investor Know Thyself!

First, I would argue that there are always good reasons (and market conditions) for investing, despite the actual state of the stock market on any given day. And despite the political affiliation of the current occupant of the White House.

Second, it's important for every investor to understand the emotional factors and forces (values, beliefs, life philosophy, etc.) that shape and animate their personal thinking about money, wealth, and investing in any market. One investor may enjoy risk-taking, so much so that they are willing to risk it all for a big potential pay-out. Someone else may be highly risk-averse, and want to avoid risk-taking even to the extent of foregoing reasonable investment gains. Still other people may be motivated not by profit or security but by other factors, such as the desire to take care of others or do good in the world.

Regardless of one's investment priorities, it's critical for every investor to understand the emotional basis of their investment style. By understanding oneself as an investor, one can pursue coherent investment strategies and plans to support their specific investment, retirement, and estate planning goals.

Three Types of Investors

Generally speaking, I've found that there are three types of investors in the world. They include the FIXER, the PROTECTOR, and the SURVIVOR, each with its unique emotional idiosyncrasies, none of which is based on party affiliation or political beliefs.

Fixers: Fixers are results-oriented investors who often enjoy taking big risks with their money in hopes of scoring big wins in the stock market. They can be Republicans, Democrats, or Independents. Their thinking about the markets isn't driven by politics, as much as it is by their perceptions of where and how to make money in any kind of market. In this regard, they are aggressive, opportunistic investors, often looking to find ways to make money that others have overlooked or discounted.

Fixers have a very strong sense of themselves as investors and play the investing game with deadly seriousness. They want to win, sometimes at any cost. Many CEOs are Fixers because of their ability to get things done. If you have a client who's a Fixer, you'll know it because they display a take-charge attitude and will be very transactional with you, their advisor.

Under normal everyday circumstances, Fixers are often charming people, but if and when they feel their financial fortunes are at risk, they can become angry, controlling, and even abusive. When circumstances become truly high-stakes, and the Fixer feels under tremendous pressure, he/she may lash out at you, demean you, and question your competence and professional judgment. "What!? You lost my money? How the hell are you going to ever recoup that for me?"

If a Fixer talks to you this way, stay calm and don't be intimidated by the tone of voice he or she is using with you. Instead, respond in a calm voice, and lay out a bullet-proof, fact-based set of facts to suggest courses of action the Fixer client should take next.

Protectors: In contrast to Fixers, Protector investors are highly risk-averse. Unlike Fixers, who aim to win big for themselves and at any cost, Protectors typically focus on how to use their wealth for the welfare of others including spouses, children and others, or to benefit specific causes.

Again, party affiliations don't apply here. Protector investors of any political affiliation are likely to be cautious about investing their money, and, in some cases, fearful of losing it to the vagaries of the market regardless of who's in charge in Congress or living in the White House. For Protectors, nervousness and anxiety (rather than confidence) about the market is likely to be the order of the day and drives their investing style.

While Protectors display little tolerance for risk, even in low-stakes circumstances (e.g. a calm market) they become exceptionally nervous when faced with economic uncertainty or market volatility. So, if you're an advisor, the time to talk with Protector clients about their investment plans is when the markets are calm. Even then, you'll probably have to nudge them to take reasonable risks with their portfolio to keep up with the ravages of inflation.

Survivors: Finally, there are Survivors. Unlike the Fixer (who often invests to achieve fast returns and takes big risks to do so) or the Protector (who wants to keep risk-taking to a minimum) Survivor investors are motivated not by profit or risk aversion in their investing style but by idealism. That's because they see economic returns not as an end in themselves, but as a means to other ends.

I'm not talking here about political idealism, but about an idealism of free market opportunity that transcends electoral politics. Yes, a Republican Survivor might be dedicated to reinvigorating capitalism, and a Democratic Survivor to the redistribution of wealth, but both take active part in our free enterprise system. They're both players in the same economic game and their investing choices are driven not by left and right-wing partisanship as much as they are by the shared belief that capitalism can serve the purposes of either.

For that reason, it's conceivable that both a left-leaning and a right-leaning Survivor investor might choose to invest in the same clean energy company: the Republican because of their interest in developing this sector of our economy, the Democrat because of their interest in the environment.

While idealistically driven in their investment choices, Survivor investors must be careful not to let their idealistic zeal color their investing judgment, especially when market conditions turn volatile. Survivors can become so enamored of a specific stock or industry, for example, that they will sacrifice reasonable (and attainable) financial gains, when market conditions change. They're essentially risk-indifferent which means they can be so idealistically wedded to an underperforming stock that they won't sell it even when common sense says they should.

If you're an advisor, pay attention to when it may be important to talk with your Survivor client about adjusting their asset mix, rebalancing their portfolio, or shedding stocks and other investments that no longer generate sufficient risk-adjusted returns.

What Happens When Fear or Greed Prevails

As noted at the start of this article, consumer confidence about the economy diverged widely between Republicans and Democrats just after the election of Donald Trump as president. But as I argue, I don't believe it's very virtuous (or valid) to try and base one's investing decisions (or economic outlook) on politics (or outsized emotions) - any more than I would ever advise somebody to try and time the market.

Instead, it's important for investors to know what type of investor they are (FIXER, PROTECTOR, or SURVIVOR) and to use that understanding as the basis of reasoned decision-making about investments under both low-stakes (normal) and high-stakes (market-volatile) circumstances. In high-stakes circumstances, it's especially important for investors to exercise good judgment, rational decision-making, and even emotional detachment, in order not to make investment decisions they later regret. This is where an advisor can be an important partner in helping an investor stay grounded when market conditions become volatile or uncertain.

Ultimately, understanding oneself as an emotional being is key to making good investment decisions based on both personal values and beliefs, as well as economic realities and market opportunity. With such knowledge and self-awareness in hand, investors can make well informed investment choices, not overly emotional ones. And, I would argue, one can prosper in the stock market, regardless of who's running Congress or sitting in the White House.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.