Elections and your investments

Personal Finance | The market already is calibrating itself to a new presidency | David Bahnsen

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One of the investment mantras I remind my clients of most frequently is that the stock market is, above all else, a "discounting mechanism." What that means is that it is constantly in the process of pricing in today what it believes will happen in the future. Brilliant value investor, Benjamin Graham, put it this way: "In the short term, the stock market is a voting machine; in the long term, it is a weighing machine." Translated into laymen's terms, the stock market acts today based on the emotions and psychology of investors, but ultimately, it acts based on the earnings of its companies.

I shared these investment principles because the market is certainly pricing in now the various possibilities that exist in this year's election. Many people have wondered if the market will react negatively to a Barack Obama victory, particularly as he has campaigned on a message of increasing the capital gains tax on investment profits. While it is indisputable that both the capital gains tax cut and dividend tax cut of 2003 have been very favorable for stock portfolios, I would also argue that the market has already priced in (at least partially) the possibility that those tax cuts are in jeopardy. In fact, based on the national voting mood and polling data, the market has probably priced in not just the possibility of an Obama victory but the probability of one.