This week’s column is a summary of a market commentary put out by Hanlon Investment Management. If you’re not familiar with them, they are one of the best money managers in America today. Sean Hanlon, the chairman, CEO and Chief Investment Officer, is often quoted in the national media for his insights on the market. Here are his recent thoughts on politics and the markets.
“Much is made in the media of the never-ending political battles that occur these days between Democrats and Republicans. These debates have the same recurring issues centered on taxes, the federal budget, and the national debt. These events of political theater are important to pay attention to, if for no other reason than to be abreast of current events. But as far as the financial markets go, do they hold any influence? Do they matter for your portfolio?
“If you look at the S&P 500 over the last six months, we can see the markets pull back in mid-November as uncertainty over the presidential election outcome and the policies the Obama administration would pursue frightened the markets; but the markets quickly recovered.
“The markets fell again in December, only to recover as the uncertainty about the Fiscal Cliff became resolved. It’s interesting how the market quickly started to recover even before the fiscal cliff resolution on New Year’s Day.
“The equity market then continued to appreciate after the resolution and into mid-February. Now, the charts also confirm the same for the sequester debate. Each of the drops in the past six months was directly related to political events, especially concerning tax policies, the fiscal deficit and the national debt. Essentially, most agree that the federal deficit, and the national debt are a serious issue that must be addressed.
“One of the consistently argued “solutions” involves the abolishment or renewal/continuation of certain tax breaks. It stands to reason that cutting a tax break would bring the federal government more revenue, and that more revenue would go toward helping the federal budget. But how much revenue would the elimination of tax breaks really bring? Is it enough revenue that the market should even flinch, such as what appeared to occur amidst the fiscal cliff debate and its resolution? With the April 15th annual tax filing date upon us, this is a good time to review these tax breaks.
“If you look at the information from the Joint Committee on Taxation, it is abundantly clear that, with a recent federal annual deficit well above $1 trillion per year, any corporate tax loophole is barely worth the politicians’ time to discuss, as closing any of the number of these loopholes wouldn’t make a noticeable dent; they are too small! It is also clear that any reaction by the market to these discussions is most likely just noise; any changes would have little noticeable impact on the economy or financial markets. It seems that the media tends to sensationalize these debates, as they often dominate the headlines.”
Now there’s a real shocker! Hanlon goes on to say.
“The logical conclusion seems to be that deficit reduction and budget balancing in Washington can only come through: a) massive increases in economic activity and the associated massive increases in tax collections, and/or, b) massive spending cuts. Closing tax loopholes simply won’t do the trick.”
So, next time you see the media hyping the latest political budget debate, don’t panic too quickly about its corresponding effect on the markets. If you had just gone to sleep in early November, and woke up March 1, you and your portfolio would not even have noticed the policy debates, like the fiscal cliff, sequesters, and budget ceiling it’s like it never happened. In the long run, corporate earnings and interest rates have the most effect on markets, not politics.
Libraries are full of books that try to explain why and when the markets go up and down, with no definitive real answers. Since the beginning of the stock markets, people have tried in vain to ascertain the “silver bullet formula” to make lots of money; and the faster the better.
So, for those people who want to chase market returns like they were on a unicorn hunting trip, by all means keep listening to the media, or just consult your horoscope. As for me; I will continue to search out the best products and money managers in America that have higher returns and lower risks.