U.S. presidential debate: Is it time to buy ‘crisis hedges’?


Getting worried about the outcome of the U.S. election? If so, join the growing club. Many pundits believe that whatever the outcome, the result could be negative for financial markets, particularly stock markets, as both presidential candidates have come down on the side of protectionism and tariffs. Consequently, many investors are wondering whether they should increase allocations to commodities, real property, precious metals, coins, and gems. But this could turn out to be a risky move for your portfolio.

Many pundits indeed believe that whatever the outcome of the election, the result could be negative for financial markets, particularly stock markets, as both presidential candidates have come down on the side of protectionism and tariffs, which are generally regarded as negatives to economic growth. Consequently, many investors are wondering whether to jump into “crisis hedge” assets. But this could turn out to be a risky move for your portfolio.

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As Canadian investors, one of the factors we have to assess is what will affect the U.S. economy going forward. That’s because the growth of Canadian GDP hinges largely on what happens to GDP south of the border. While the current U.S. election campaign provides for some great political theatre, it isn’t necessarily a key trigger to re-evaluate your portfolio. And we just don’t see any imminent threat to U.S. GDP growth trends at this time.

With employment, wages, labour-force participation, consumer confidence, manufacturing, and inflation all on the rise, the U.S. economy is clearly on a growth track, and the Fed expected to raise rates in December. Elections are transitory shorter-term events, and in and of themselves have only a limited short-term impact on markets.

We don’t believe there’s any reason to be “fearful” of the election outcome. In fact, it would probably be a mistake to make any wholesale shifts into so-called “hard” assets like gold or precious gems, as a result of wall-to-wall media coverage of the U.S. election.

A Trump win, which seems increasingly unlikely, given his unfocused campaign and strong resistance from his own Republican party, would most likely be temporarily bearish for markets owing to his stated anti-free-trade/pro-tariff economic platform. Any moves by a Trump Administration to tinker with or repeal the North American Free Trade Accord (NAFTA) would be a net negative for Canadian manufacturing and export sectors.

It should be no different with Clinton. Currently, the odds are definitely tilting more towards a Clinton win, which would generally be a net positive for the U.S. economy and markets, and by association, for Canada as well. As the lesser of two evils, she more or less represents a continuation of Washington business as usual – an extension of the Obama administration.

Clinton is unlikely to change Obama’s fiscal policies. She is likely to push for greater socialization of Obamacare, which will end up as another vast entitlement that will have to be paid for somehow, probably by increasing the already gargantuan U.S. debt overhang. She’s promised to “tax the rich,” and spend more on “infrastructure.” Frankly, all candidates say that. That will eventually be a drag on GDP growth, but it will take another few years to implement, so there’s no direct immediate effect on Canadian investments there.

Although she seems to be against any Pacific trade agreements, Clinton is unlikely to tamper with existing agreements such as NAFTA, which would be a plus for Canadian businesses.

The trouble with increasing asset allocation to precious metals or gems is that in purely investment terms, they are a non-producing asset. They don’t pay interest or dividends. There may be potential for capital gain, but you have to understand that this would be totally speculative, and that you’d easily also incur capital loss. After the U.S. election, will there be such a big demand for (or a sudden shortage of) diamonds or gold or silver to the degree that you’ll profit handsomely when you sell? Who knows? When you purchase these types of assets, you’re betting that there will be. And note the key word there: “betting.”

Instead of betting on the outcome of the U.S. election by buying non-producing “haven” assets, it makes a whole lot more sense to purchase ownership in something that grows intrinsically while rewarding you along the way – in other words, owning profitable, dividend-paying businesses – and sticking to your existing portfolio allocations.

Courtesy Fundata Canada Inc. © 2016. Robyn Thompson, CFP, CIM, FCSI, is president of Castlemark Wealth Management. This article is not intended as personalized advice. Securities mentioned are not guaranteed and carry risk of loss. No promise of performance is made or implied.

© Copyright Battlefords News Optimist


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