Dominic Ceci: Three preelection topics for Wisconsin investors

The column below reflects the views of the author, and these opinions are neither endorsed nor supported by WisOpinion.com.

The looming election weighs on many investors’ minds. Here are three big reasons why history suggests you can set the election to the side when conducting financial planning.

Pulling money out of markets to avoid elections works against you. Historically, going back to 1960, if you were to have invested $100,000 in the S&P 500 Index but taken the money out for six months every four years—during the second half of election years because you’re worried about the impact of elections—you would have lost half the return versus simply staying invested.
Similarly, investing only when one party or the other is in power works against you. Since 1896, you would have missed on a return approximately 10 times higher if you’d simply stayed invested!
Economic growth, stock market performance, and election outcomes are uncorrelated, historically. Sometimes people say Republicans will be better for, say, the oil industry, but even that doesn’t play out how you might think.

Historically, presidential elections aren’t particularly important for investors. We don’t set investment policy based on politics and advise that no one else should either.

Looking past the election, many investors are focused on two big themes: artificial intelligence (AI) and the health of the economy. Both relate to Wisconsin.

Artificial Intelligence (AI)

AI has been this decade’s “smartphone moment.” It’s an interesting growth story. We don’t know exactly where it’s going. Estimates for the impact on GDP are all over the map, from almost none to trillions within the next 10 years. What we do know is that companies are spending a lot of money right now to build out AI infrastructure.

Much of that infrastructure involves data centers. Interestingly, these tend to be built in concentrated clusters because of the power and water demands. Loudoun County, Virginia, is a good example—and Southeastern Wisconsin has the potential to be so in the future.

Actual adoption of AI right now is pretty low, around 15-20% even in tech-forward industries, and more like 7% in others. So there’s a lot of room for increased usage of these technologies. It’s a pretty common narrative that when ChatGPT went live, it had the fastest user growth of any app ever. But what you don’t often hear is that user engagement is among the lowest. People go on out of curiosity, play around with it, but then don’t really engage with the product much after that. For professional applications, the costs are still high.

So, for now, the winners are the companies building the core infrastructure. There’s government money behind that, and plenty of private investment too. That cash flow is real. Beyond semiconductors, energy and infrastructure are the big winners here.

Health of the Economy

Wisconsin is a useful microcosm illustrating the Federal Reserve’s challenges.

Wisconsin’s 2.9% unemployment rate is low for problematic reasons. The workforce participation peaked in 2017, with older workers retiring and not being adequately replaced by younger workers. Additionally, prime working-age people with families are opting out of the workforce due to high childcare costs. This has led to a tight labor market where businesses are struggling to find workers to fill open positions.

So, even though unemployment figures are attractive, things may be somewhat worse than they appear based on economic data. Consumer surveys show people think it’s harder to find a job now than earlier in the year. If people perceive the labor market as more challenging, that may lead them to slow down spending. That said, economists are largely lining up behind the proverbial “soft landing” coming to fruition, meaning no recession in sight.

Still, cost of living is a difficult topic. Lower inflation misses a big part of the story. Prices went up a lot and are now just going up more slowly. The fact that the price of eggs went from $5 to $6 and is now rising at a slower pace to maybe $6.20 next year doesn’t change the fact that eggs are a lot more expensive than they used to be. Those higher price levels are more impactful for lower-income consumers. Those extra dollars really add up for them and can lead to cutting back discretionary spending.

A big theme is that the economy is bifurcating, not just for households but for businesses too. Smaller companies are having a harder time than large corporations, and a big part of that is their higher cost of borrowing. Large companies with good credit are borrowing at rates not that far above Treasury yields. But smaller, riskier companies are paying double or triple that, often on floating rate terms that increase their vulnerability. There’s a big difference in how different tiers of businesses are weathering this environment.

Long-Term Lens

In our investment process, we look at things with a very long-term lens. We believe that’s how you win as an investor. If you try to trade short-term moves, you’re likely to lose money and even if you get it right, you’ll face high tax rates. So we forecast returns over 10-15 year horizons.

Through that lens, we expect the return outlook to flatten out, with bond yields staying in the current range. Equities are expensive, so returns will likely be on the lower end of the historical range over the next 10-15 years. If you’re investing new money today, you probably won’t get a 10% annual return like the long-term historical average.

The good news is that bonds are in a much better position now than they were a decade ago when rates were so low. And alternative investments can be additive in this environment as well. Several opportunities in the alternative-investment space are attractive right now.

Our best advice is to stay diversified across stocks, bonds, alternatives … and ignore the impulse to make investment decisions relating to politics.

As seen in Wispolitics.com