The Election Won't Change the Markets

07/11/2012 9:45 am EST


Richard Lehmann

Publisher, Forbes/Lehmann Income Securities Investor

Whether it's politicians, financiers, or average Americans, realistically our problems are more systemic than political, so don't expect the November elections to mean triumph or tragedy, observes Richard Lehmann of Income Securities Investor.

I've compiled the year-to-date results of our model portfolios versus the major stock indexes on a total return basis.

All the portfolios except the low-risk one showed a decline from the first quarter, but finished the year to date with positive results. The major stock indexes also took a hit for the quarter and finished year-to-date about the same as our model portfolios, albeit with a lot more volatility.

The overall investment outlook continues to look bleak. We have an economy that is not growing, high unemployment, a European banking crisis and recession, out of control government spending, a Congress that is deadlocked, unsustainable debt levels, un-payable unfunded mandates at all levels of government, and a President in charge during all this who is a threat to be re-elected.

Have I left anything out? Well, yes, but how much truth can you stand at one time?

We would probably be inclined to sell everything and stay in cash were it not for the fact that we have all seen much worse in the not too distant past. We also know that going to cash presumes that there will be a better entry point in the near future...and that is far from clear.

Investors’ main concern today is uncertainty, and this will get no better for at least another six months. In six months, we will have either the certainty that things will definitely get worse or that promising changes are coming.

No matter how the presidential election comes out, things will not get better for a long time. Our problems are as much systemic as political. Even if one party can rally the political will, getting industry to respond quickly is doubtful.

Also doubtful is whether today’s problems can be solved by economic growth and spending controls alone. My guess is that we are past that point.

The silver lining to this cloud is that neither outcome should significantly change the outlook for income-oriented investors, since we learned some time back that it is actually the Federal Reserve that controls their investment destiny. With this fact in hand, we can be more definitive about the next 12 months.

That outlook is for low short- and long-term interest rates and possible deflation, all of which makes high-income securities the most obvious buys around. Yes, market volatility will continue, but as investors move out of growth stocks they will likely rediscover the comfort of income securities which pay them 5% to 8%. In today’s low interest rate environment, this can only be viewed as a gift.

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