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Politics and Portfolios: Could Populism Hurt the Market?

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RANDY FREDERICK: Hello, and welcome to the Schwab Market Snapshot for May 24. I’m Randy Frederick.
 
Domestic equity markets seem to be going nowhere fast. Whether it’s the election, the Fed, economic data, or global concerns, it seems like there are just too many unanswered questions for investors to be confident in their decisions. So, today, I’m speaking with Jeffrey Kleintop, Schwab’s chief global investing strategist, to get his perspective on some of these issues.
 
Welcome back, Jeff.
 
JEFFREY KLEINTOP: Thanks. Great to be here.
 
RANDY: So, Jeff, let’s start with the political landscape. It’s not just in the U.S. where it seems like politics and reality TV are merging together. In Europe, and especially in the U.K., it seems like there’s a lot of political uncertainty. So, what I’d like to do is get your thoughts on the rise of anti-establishment populism that we’re seeing in this British vote on continued EU membership—which we also call the Brexit vote—and on the upcoming U.S. elections.
 
JEFF: Well, you know, for the last five years, I’ve been asked when the political establishment was going to blow up in a wave of populist discontent fueled by failed promises of prosperity. But in Europe, not here in the U.S. It’s interesting to finally see it come home here. You know, a Barron’s article—gosh, just last week or so—talked about populism and the rise of populism being the biggest risk we face as investors.
 
I disagree with that, and I think we can look to Europe as a great example, because in Europe, this rise in populism happened—began years ago. We saw it with France electing a Socialist Party president back in 2012. Even more recently, with the rise of the Pirate Party in Iceland. Yeah, we think a red ball cap saying “Make America Great Again” is a strong political statement. Try a skull and crossbones! They are serious about it over there.

And then, more recently, with Syriza in Greece taking over the government in 2015.

But here’s the thing, Randy, policy actually shifted to the right rather than the left. Many of these parties had to abandon their campaign promises, even go in the other direction and adopt tax cuts, labor reforms, lower trade barriers, impose budget austerity, lots of things they hadn’t planned on, because economics dictated it. And that’s the real key here. And I think that’s a real lesson for investors here in the U.S. or elsewhere, thinking that we might see sweeping political change. History says otherwise.
 
RANDY: Well, that’s a really surprising outcome, and it seems a whole lot less drastic than what a lot of U.S. investors, I think, are worried about the November election. So, does this mean that investors need to stop worrying so much right now?
 
JEFF: You know, maybe. I mean, there are probably three takeaways investors should keep in mind.
 
One, don’t assume candidates can implement what they’re campaigning on. While political risk is certainly going to create some volatility in the markets, it’s probably not going to create a lot of economic volatility. That’s what we’ve learned from Europe.
 
The other key is that markets and the economy have tended to influence elections more than the other way around. That’s always good to keep in mind. And I’d note that, you know, we’re seeing somewhat of a strengthening trend in many global economies.
 
And, finally, look to avoid selling during some of these pullbacks tied to political volatility. They’re going to happen from time to time, but you may want to actually put some cash to work if you’ve got it. You know, taking a look at maybe mega-caps that are very sensitive to trade protectionism, since we’re probably not going to see a whole lot of that. The technology sector, the industrial sector—also very sensitive there—they may be good places to add on pullbacks, Randy.
 
RANDY: Well, that makes a lot of sense. So, let’s shift gears a moment and focus a little bit on opportunities. I know that emerging markets have been really top performers in 2016, so the two questions I have for you is can you tell us why they’ve done so well and is that what you’re expecting for the second half of the year?
 
JEFF: No, we actually expect performance to lag a little bit in the second half of the year. One of the big reasons why emerging markets did so well in the first half really had to do with the dollar falling. They’re very dollar-dependent. When the dollar goes up they tend to underperform and when it goes down they tend to do well. A variety of reasons: The main one is they’ve got a lot of dollar-denominated debt. And so when the dollar goes down, that means it’s a little easier for them to pay off that debt.
 
But that’s not the only reason—because we expect to see a flat-to-higher dollar in the second half—that EM might lag. We’ve also seen better economic growth in some developed countries lately. In Q1, both Europe and Japan surprised to the upside.
 
And then, finally, commodity prices might begin to level-off, and that’s been a wind to the back of emerging markets, as well. So, while they still make long-term sense, you might see them lag a little bit in the second half versus their leadership that we saw in the first four months of the year.
 
RANDY: Okay, so it sounds like chasing emerging market performance in either direction may not be the best plan right at the moment.
 
Well, believe it or not, we’re already out of time. Thank you again for your unique perspective. I’m sure it’s very helpful.
 
But, look, if you have additional questions, please call. Talk to a Schwab investing professional. If you want to read more from Jeff you can get that on Schwab.com in the Investing Insights and the International Investing section of Schwab.com. You can also follow Jeff on Twitter @JeffreyKleintop. And, of course, you can follow me on Twitter @RandyAFrederick.
 
We will be back again. Until then, invest wisely. Own your tomorrow.

Important Disclosures
Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author’s opinions may change, without notice, in reaction to shifting economic, business, and other conditions. The information presented does not consider your particular investment objectives or financial situation (including taxes), and does not make personalized recommendations. Supporting documentation for any claims or statistical information is available upon request.
Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.
International investments are subject to additional risks such as currency fluctuation, geopolitical risk and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.
Schwab Center for Financial Research (“SCFR”) is a division of Charles Schwab & Co., Inc.

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