In light of recent tumultuous events, including the assassination attempt on former President Donald Trump and current President Joe Biden's exit from the U.S. presidential race, it's essential to be able to address the concerns your clients may have and help them navigate through the resulting uncertainty. Understanding the behavioral biases that may influence their decision-making can be particularly valuable during these times.
Presidential elections have real impacts on markets and investors, since presidents can influence economic policy, regulation, taxation, and other key government actions, yet most people overestimate both the magnitude of these effects and a president’s power to make changes. For example, the president has little power to influence interest rates in the short run, given the independence of the Federal Reserve. Similarly, while gasoline prices are common complaints about presidents, their ability to significantly change is not what people expect. Economic changes tend to happen slowly, and with long delays. In short, presidential elections are important for the long-term economic health of the United States, but in the absence of catastrophic errors, they are unlikely to cause immediate large changes. Even in an election where the underdog won, the outcome was not a huge surprise to markets, which had priced in a greater than 30% of President Trump winning. The U.S. system is designed to not dramatically shift with the election of one person. There is no reason for the vast majority of investors to expect significant immediate changes.
What are truly threats to the economy, however, are the perception economic changes will be dramatic and any social and political unrest. The biggest threat to an investor is the fear that election outcomes require massive actions to investment strategies not justified by underlying economic factors. This is why they have and benefit from financial advisors who can help them reason through any potential changes and act (or not act) accordingly
So, What’s Going On?
- The assassination attempt on former President Donald Trump has added a layer of unpredictability to the political landscape by projecting and affecting market sentiment. It has raised concerns that surprise events might change expectations immediately and has raised the specter of social unrest in the wake of the election and disruptions to the smooth transitions of power.
- Until more firm economic policy proposals have been put forward by both sides of the presidential race, there is uncertainty in investors around the economic outlook, including fiscal stability, inflation, taxes and tariffs, etc. These are all likely to be influenced by the election, but their effects will be less immediate and drastic than investors expect. Fiscal stability is a significant concern for the long-term economic health of the United States. However, the 'fiscal cliff' remains a distant issue, and there has been limited discussion on addressing the deficit through increased revenue or reduced spending, particularly in areas such as Social Security or Medicare.
- Uncertainty on whether the Fed will lower interest rates, possibly even before election day, might impact the stock market and bond rates on a more short-term basis. The Fed’s reasoning on either outcome will likely inform market participants’ expectations about short-term inflation, unemployment, and GPD development. It’s important to note that the Federal Reserve under Jerome Powell has moved cautiously in lowering interest rates, such that considerable changes remain unlikely in the short-term future. Very few economists believe that Powell will be influenced by election outcomes, which is why the Fed was given such independence when designed.
- On a more long-term basis, it remains to be seen how the increased uncertainty involving US presidential elections impacts the US’ standing in the global economy. This is one basis on which a president can damage the economy through trade agreements and global conflict. The country is heavily dependent on amenable relations with the rest of the world, and animosity from abroad can hurt global trade that is largely beneficial to the country.
Client Concerns:
Market Volatility: Clients may be worried about increased market volatility and its impact on their portfolios. Market volatility is complex to understand in the context of politics, so such worry is understandable.
Economic Uncertainty: The uncertainty surrounding fiscal policies, political stability, and economic data could make clients anxious about the stability and growth of their investments, even if any major effects are likely to be slow to develop.
Behavioral Biases to Consider:
Recency Bias: Clients might place undue emphasis on recent events and market movements, leading to hasty or reactive decisions. If the past few weeks’ political events are any indicator, there will be many more big changes in recent news to come.
Confirmation Bias: In times of political and economic uncertainty, clients might focus on information that confirms their preexisting views, potentially leading to unbalanced decision-making. News networks and social media paint very different economic pictures. Is 4.1% unemployment “the economy going in the wrong direction” or “slightly higher but still historically low unemployment?” The next few months will be a firehose of news of all types.
Loss Aversion: The fear of losses might drive clients to make overly conservative choices, potentially missing out on future gains. This loss aversion can be exacerbated by potential political losses, which hit investors emotionally hard for a few days before they return to a steadier state of mind.
What You Can Do for Your Clients:
Assess Risk Tolerance & Risk Perception: Use this time to revisit your clients' risk tolerance and ensure that their investment strategies align with their long-term goals and comfort levels. Use Atlas Point's Uncertainty Mindset™ tool to dig deeper into a client’s feeling of worry to understand their perception to risk and optimism during times of financial uncertainty. The report provides you with tailored recommendations on how to best talk to your clients regarding their emotions around risk.
Discuss Behavioral Insights: Easily educate clients about common behavioral blind spots they may have and how they might influence their decision-making using Atlas Point's Financial Virtues® assessment. Identifying and recognizing these biases can lead clients to make more rational and informed investment choices.
Listen to Their Concerns and Fears: Let them explain what worries them and how they are thinking and feeling about their money in relation to current events. Acknowledge that these concerns and fears are important and real because the investor is experiencing them, then help them understand that you are following events while understanding that you have all the tools to make any needed adjustments.
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