What the 2016 Election Means for
Investing and the Markets

As the 2016 election heads into the home stretch, the rhetoric from each camp heats up with dire predictions about what the outcome will mean for investors.

Republican candidate Donald Trump may warn of a future economy crippled by rising taxes, rampant regulation and stagnant growth, while Democratic candidate Hillary Clinton may warn about the ruinous effects of an ever-widening wealth gap and a possible U.S. debt default.

This election finds most investors worried about the market as it is, says Glen Johnson, managing director at Mirador Family Wealth Advisors.

“When I talk with my clients, there are a lot people asking, ‘Will the better times ever return?’” Johnson says. “The old return rates, in the range of 7% gains for equities, might be gone. Some of the growth we’ve seen is propped up by low interest rates and easy credit conditions. But will they still exist after the election?”

The prospect of a new president and a reconfigured Congress only makes these questions harder to answer. Although uncertainty has the ability to impact the markets, today’s investors have largely stayed the course through major question marks like the prospect of a collapsing eurozone and the slowing economy in China, says Jeff Korzenik, chief investment strategist at Fifth Third.

“The standard election-cycle uncertainty really isn’t all that consequential for overall economic growth,” he says

There are some profound policy differences between the two presidential candidates. But regardless of who wins or whether the executive and legislative branches of government are united under the banner of a single political party, the economy and capital markets will still likely offer opportunities for investors, Korzenik says.

“If there is a wholesale shift to, say, a Democratic sweep of the White House and Congress, that would raise the level of uncertainty, and could result in tax and regulatory policies that harm growth in the short term, even if they have worthy long-term public benefits” Korzenik says. “On the other hand, a Republican win of the White House would also raise the level of uncertainty. Because of the lack of clarity surrounding Mr. Trump’s specific economic policies, we’ll be watching closely to see whether our multi-decade commitment to global trade erodes, which would pose some concerns. ”

The Upside of Uncertainty

While the only certainty the elections bring to the markets is uncertainty, Korzenik is quick to note that uncertainty is not a code word for a decline.

“In fact, uncertainty can have a bright side for investors, particularly investors who are focused on specific industries, and who maintain a long-term perspective,” he adds. “For one thing, you can take advantage of improved valuations, because we know that uncertainty eventually passes.”

One reason for Korzenik’s sanguine outlook is that he expects changes in the U.S. political landscape to have little effect upon many of the underlying drivers of the overall economic growth.

“We expect more of the same in terms of U.S. economic growth, in the range of 2%,” he says. “Our view at Fifth Third is that as long as global and U.S. economic growth are going forward, you still have to have a bias toward, and comfort level with, owning equities.”

Korzenik believes there’s reason to expect a small post-election boost for the economy. Both candidates have promised fiscal stimulus in the form of infrastructure and defense spending. He also expects the election to have little effect on interest rates, with the possibility of two more rate increases in 2017. In that environment, equities would probably be looking at a positive single-digit return, he says.

Alternative Assets and Emerging Markets

One area where the election could have a more pronounced impact is in the alternative assets, such as real estate and the art market, Korzenik says. That’s something to watch closely if the election brings in lawmakers committed to a higher tax rate on the wealthy, he says. Transaction taxes or the introduction of new fees could also have an adverse effect on certain alternative investment strategies.

But even if that is the case, the election probably won’t alter the way ultra-high-net-worth investors manage their holdings, says Johnson. “In this class, 40% of portfolios are illiquid, meaning they can’t be quickly sold. Hedge funds and private equity are a bit less likely to be impacted by cyclical events. With 10-to-12-year time horizon for private equity investments, global macro or short-term events have very little immediate impact.”

Michael Donovan, a Fifth Third wealth management advisor in the greater Chicago area, notes that emerging markets will continue to benefit from a number of trends, regardless of what happens at the polls in November

“In the big macro sense, there are a lot of individuals all across the world who want to be middle class, and that’s a trend you can’t really stop. We’re a little underweight in emerging markets right now, but long term, there’s a lot of potential in those countries,” Donovan says.

In the end, Korzenik advises investors to maintain a sense of perspective. “We’ve changed presidents many times—this will be the 45th—so we’ve been through these transitions before, each with their own risks and opportunities. Our aim is to help our clients to avoid the risks, and find the opportunities.”