Tags: Political | Uncertainty | Markets | Invest

Political Uncertainty in Markets Is Your Friend, Not Your Foe

Political Uncertainty in Markets Is Your Friend, Not Your Foe

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Friday, 04 November 2016 07:58 AM Current | Bio | Archive

 

For 12 days in October 1962, the world nearly ended.

That’s not hyperbole. In the days since, we’ve never come closer.

Those were the days of the Cuban Missile Crisis, when Soviet missiles were being installed in the Western hemisphere at points a few hundred miles off the U.S. coast and where they could reach nearly the entire North American continent.

 

Stocks tanked on the news, mirroring fears of nuclear annihilation. But stocks had already made a powerful rally in 1961 and had been trending down for most of the year. And the market started rallying five days before the crisis ended—on news that the United States was going to “quarantine” Cuba to prevent further Soviet shipments.

The short takeaway here is that Mr. Market pays some attention to the political headlines.

But he quickly sorts through the investment implications. And if it looks like the world is going to end politically, so what? As long as earnings are good, Mr. Market tends to shake off even the worst events. That said, because political events tend to flare up, tank markets, then die off quickly, it’s often a great short-term buying opportunity for stocks.

That’s been the case with other geopolitical events as well. Even after the 9/11 attacks, the last time the market exchanges briefly closed, stocks came roaring back to pre-crisis highs within 90 days. Indeed, the bigger uncertainties right now aren’t political in nature, they’re financial.

Markets, on the whole, trade at above-average valuations. They’re not quite bubble territory, and today’s seemingly-lofty valuations might be a normal level for a world still mired in near-zero interest rates. Meanwhile, corporate earnings have come in pretty strong on average. Microsoft (MSFT) reported great numbers and its share price has now exceeded its dot-com-era high. If you bought at the top back in 2000, congratulations!

It may have taken nearly a generation, but you’ve finally made a positive return. Today’s Microsoft trades at a decent valuation, especially compared to its 2000-era counterpart. Its cash flows are much higher, and it rewards shareholders with a growing dividend. It’s a different beast, but one that can continue to trend higher from here so long as it continues to perform well operationally. It just goes to show that the price you pay matters, and overpaying is fatal to your returns as an investor.

That brings us to today’s political uncertainties. We’ll likely see some turmoil across a few sectors in the weeks ahead as we sort out the election results. But even the 2000 Election, which took months to finalize, didn’t cause any lasting harm to markets (which were already starting to decline thanks to the tech bubble). There should be some good opportunities to buy companies at prices lower than today in the coming weeks.

Here’s where I’d focus new capital to invest in during the next politically-connected market selloff:

#1) Preferred stocks. These high-yielding issues are one of the best areas in terms of risk and reward right now. They sold off heavily at the start of the year on fears of a faster pace of interest rate hikes from the Fed—a fear that never materialized. I expect the Fed to raise rates a quarter point again in December, so we’ll likely see a decline in the preferred space before that happens, or after if there are fears of a bigger move. Preferred shares are usually issued with a par value of $25, I’d look for opportunities to buy in the low $20’s among the big bank names. There are a few such listings today in the preferred space, but there should be more if we get another interest-rate sensitive selloff in the coming weeks.

#2) Utility and utility-like stocks. One of the biggest leaders year to date have been utilities and telecoms. It’s where the safe money can flow into stocks with some bond-like consistency, and as a result, they’ve traded like growth stocks for most of the year. But many names are giving up their gains, and if this trend continues, they’ll once again be in buying range. Unlike an actual bond, buying a utility allows you to get increasing income payments over time as dividends are gradually increased. Historically, over the past few years the S&P 500 Index has paid around 2 percent annually, and utilities twice that. Given the rally in these stocks year-to-date, those yields are lower on average. I’d wait for a chance to get at least 4 percent yields before starting to buy into the space.

#3) Consumer goods. Since a market decline tends to affect all stocks, a political-event-driven pullback in stocks makes for a good opportunity to buy shares of consumer goods companies. Firms that make things like food, health and beauty products and the like. Barring the literal end of the world, people will still need soap, shampoo, razors, ice cream, you name it. These companies tend to hold up better than the overall market, so don’t expect to ever get these companies for a phenomenally cheap price. That’s okay, you’ll do well over time as long as you buy on those brief uncertainties that grip the market from time to time.

#4) Technology companies. Microsoft is hitting new highs for a reason. It’s part of today’s increasingly interconnected world of gadgets. That will only increase. New technologies represent the future of humanity, not the short-term fears from politicians that briefly dominate headlines. In this space, I’d focus with big, established companies that pay dividends. While smaller companies may get bought out or have bigger moves, if you’re buying during periods of political uncertainty you should at least get paid to wait.

 

Politicians like to create the impression that the world is coming to an end. Sometimes, that impression is far too close. But such fears tend to be brief, and create buying opportunities in the market. I don’t know what we’ll see as we move past the 2016 election, but any market selloff for political events tends to be a buying opportunity.

Ignore the political headlines and use the weaker price to buy quality names at discount prices.  

 

Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and is managing editor of Financial Intelligence Report.

© 2019 Newsmax Finance. All rights reserved.

   
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AndrewPacker
I don’t know what we’ll see as we move past the 2016 election, but any market selloff for political events tends to be a buying opportunity. Ignore the political headlines and use the weaker price to buy quality names at discount prices.
Political, Uncertainty, Markets, Invest
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2016-58-04
Friday, 04 November 2016 07:58 AM
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