The US Elections and Your Investments

We’ve all now come to grips with the result of the U.S. election. Given the polls just before election day, the outcome was a surprise, to say the least.  The result has been compared to Brexit, which was one that was similarly surprising.

Perhaps we are less sceptical. Living in the world of financial markets, we know that probability is only ever as the name suggests.  It represents something that is likely or probable to occur, and so is very different to the word certainty.

Markets quickly adjusted yesterday as reality set in. Overnight, S&P 500 futures markets were down. It has rebounded today though, and is up 1.4% at the time of writing.  All that means is that, ironically, investors don’t know what this means.  Will the American business community reign Trump in, or will he be allowed to follow through on his election campaign promises?  Trump won’t be able to pass law, but he will be able to put a block on securing trade deals (such as the TPPA), for example.  Many New Zealanders that are anti-TPPA would also be very anti-Trump, and yet he’s very likely to kill the deal that they didn’t like.  It shows how complicated this election really is.

From the perspective of your portfolio, it’s intriguing to look at the relationship between the US president and investment returns. Historically, markets have done better when a democrat is president rather than a republican (9.7% growth as compared to 6.7%). However, the same data shows the markets do best when the republicans control both the House of Representatives and the Senate.

Source: http://time.com/money/page/2016-presidential-election-clinton-trump-affect-finances/

After this election, the republicans hold the House, the Senate and the presidency.

But there is more to the data. When the US president has a negative approval rating the markets have done 4% better than when the country gives the president positive ratings.

In reality, the data indicates that the relationship between investment markets and the presidency is a fairly weak one. What drives markets are businesses that innovate, solve problems and continually provide better goods and services at lower prices. Businesses have been doing this for hundreds of years and will continue to do so for many more.

Someone almost universally regarded as being one of America’s worst presidents was Warren Harding, the 29^th US president (1921 – 1923). Amongst his many blunders, he appointed a number of corrupt officials.  One of his cabinet secretaries went to prison for corruption. [1]

How did he get elected? Author Malcolm Gladwell suggested in his book Blink that people believed Warren Harding would be a good president because he appeared stately and presidential.  It was a “blink” decision. [2]

Why do we bring this up? Only because between 1921 and 1923, the Dow Jones returned around 32%. [3]

“Conventional wisdom says a president’s economic policies matter greatly to Wall Street. But… investors since the Great Depression have managed to make money in war and peace and under successful and failed administrations.” ^[4]

Many of our clients are invested in portfolios built to last 20 to 30 years. Over that time frame, both good times and bad times are a given. That is the nature of capitalism which funds, what we can see in retrospect, are both worthwhile and worthless economic ventures. We believe history shows us that a globally diversified, low cost portfolio is a ship that can and will survive the storms of politics, because it is founded on the success of business. Presidents come and go, but business in aggregate has never gone out of business, and won’t in the future, whatever president-elect Trump does.

So we encourage you to relax, to tune in to the news as an interest, but know that your long term plans are based on something much more solid and stable than politics. 

[1] http://time.com/money/page/2016-presidential-election-clinton-trump-affect-finances/
[2] https://en.wikipedia.org/wiki/Teapot_Dome_scandal
[3] http://content.time.com/time/specials/packages/article/0,28804,1879648_1879646_1879696,00.html
[4]http://www.automationinformation.com/DJIA/dow_jones_closing_prices_1921_to_1930.htm

The History of Insurance

Insurance as a concept has been around as long as humankind in some form or fashion. Insurance at its core is about the distribution and management of risk, and as thinking animals, man has been doing so for thousands of years. Whether it was hunting in a group to minimise risk of injury or splitting vital goods among different carriers on a dangerous trail through the wild, both things are at their essence about the distribution of risk. They are 'insurance'.

As a more formal enterprise involving money, insurance has been with us since the ancient world. The 1750 BC Babylonian Code of Hammurabi included reference to a debtor not having to repay a loan if some horrendous unforeseen event should befall them. These events included natural disasters, disability or death. Early Mediterranean naval merchants received loans to fund their shipments. When they did so, the merchants paid the lender an additional fee in exchange for a guarantee from the lender to cancel the loan if some woe should befall their shipment at sea.

The ancient enscription of the 'Code of Hammurabi'.

In medieval Europe, insurance was carried out in the guilds. The guilds with more money behind them set aside coffers of gold and currency that were used as an insurance fund. If a guild member's house burned down or they were robbed, the guild would compensate them using money from this fund. If a master was disabled or killed, this fund would go to support their widow and any family they may have left behind. In this way, the guilds offered forms of home insurance and life insurance.

The first known insurance contract was from Genoa in 1347 AD, and from there maritime insurance developed widely, including contracts that had scaled costs based on the differing risks of certain routes and voyages. Moving into the enlightenment and Early Modern Europe, the process of underwriting first came to be. Wealthy investors and those who wished to invest would take on responsibility for certain ship's cargo in voyages to the new world. If that cargo were lost or destroyed, refunding would be their financial responsibility. In exchange, these investors (the first underwriters) would be promised a share of the riches, crops or precious metals the voyages discovered in the Americas (which were believed to be teeming with them). The main appeal for these underwriters was the acquisition of new world tobacco.

Tobacco was just as addictive in the Early Modern Era, as it motivated the first underwriters to 'insure' voyages to the Americas.

Formalised property insurance came into being in the aftermath of The Great Fire of London in 1666. The unprecedented devastation of the fire was estimated to have claimed the properties of up to 70,000 of the city's 80,000 population. Groups of the underwriters mentioned previously, who had up until this point only dealt in maritime insurance, began to see the need for fire insurance, so they formed companies and offered to the general public at a price (the 'premium'). The development of insurance was also contributed to by the development of mathematics. The Frenchman Blaise Pascal discovered a numerical way to express probabilities, and this was applied to risk of certain events. In the wake of this discovery, it became possible to assess and give costs to various categories of risk based on their prevalence or probability of occurring. This is why today, when you go to purchase life or health insurance, your premiums will be higher if you are older or in more infirm health (you present a higher probability or 'risk' of a claim).

Whilst the insurance business began to thrive in Europe, overseas it was a different matter. In America especially, colonial life was deemed to be far too fraught with risk for any prospective insurer to even touch, lest they find themselves rapidly bankrupt. As a result, it took almost a century for insurance to become widespread in America after its initial colonisation. When it finally did however, more recent developments from Europe were incorporated into its design. At this time, all the hallmarks of modern insurance were in place and whilst insurance continues to change and develop to this day with the technology and the times, the core bedrock remains the same.

It's safe to say that insurance will always be part of society in one way or another. The process of distributing and managing risk seems to be engrained into our social being and our rational minds, as does the desire for profit and protection which informs both sides of the insurer/policy holder relationship.