Politically-driven market volatility is on the way in 2019, according to Andy Friedman, principal of the Washington Update, a consulting firm focused on speaking to advisors about political affairs. Chris Cordaro, managing partner and chief investment officer of RegentAtlantic, says advisors should take advantage. “Market volatility usually creates some undervalued opportunities. If something is sold off, there is something to value buying,” he says.
When thinking about volatility, Cordaro says the big thing to remember is “there’s always a political headline that will come out of the news. The question is whether this headline is impacting the long-term valuation of assets, or is it a knee-jerk move towards volatility?” he asks. But Cordaro’s view that opportunity created by volatility should be taken advantage of is not held by everyone.
Politically-driven volatility “can [create] periods of opportunity, but movements in the market from political disruption are very hard to time,” Christopher Smart, head of macroeconomic and geopolitical research at Barings, says. “Maybe you are able to pick up some assets for a cheaper price, but it is not always clear they will bounce back right away,” he says.
“The best advice for an advisor is to wait it out,” Smart says.
Instances of politically-caused volatility are “temporary events that will surprise people. But to the extent advisors are focused on the long-term,” short-term events shouldn’t dictate long-term performance, he suggests.
And sources say multiple political events may drive volatility in 2019.
One event to keep an eye on is the vote to raise the U.S. debt limit, says Friedman.
“Congress authorized the federal government to borrow additional funds through March 2. And if Congress does not extend that authorization by raising the debt limit, beginning on March 3 the government won’t be able to borrow funds. The federal government can limp along without additional borrowing for about six months using current tax receipts and funds set aside for future expenditures. But, by early next fall the government will need to borrow more” to pay interest on outstanding debt, a Washington Update press release reads. And while the release says it’s “clear” the U.S. will not be allowed to default on its debt, “the uncertainty could have a profound effect on the markets,” it notes.
Standard & Poor’s downgraded the U.S. credit rating from AAA to AA+ in a similar debt ceiling debate in 2011, the Washington Update observes. And that “led to a global sell-off in equities and a flight to U.S. treasuries, lowering interest rates,” Friedman says.
Smart also says advisors should keep an eye on the impending need to raise the debt ceiling.
“It is very likely that things will go down to the wire” for approving a new debt ceiling, he says. “The temptation is high for both the Democratic and Republican parties to use the debt ceiling as a club to secure what they want. And I think there will be a period of market volatility in there,” Smart adds.
Among other upcoming political events, Friedman and Smart point to the House of Representatives' administrative hearings into data privacy and banking, as well as possible outcomes of the president’s tariff program, as having the potential to inject short-term volatility into markets.
But Smart affirms advisors should keep clients focused on their long-term investment plans amid volatility.
“If clients are investing in the broader growth prospects of the U.S. and the global economy, they will inevitably face short-term ups and downs. The important thing for an advisor to do is to keep clients' eyes focused on the horizon, rather than the bumps in the road along the way,” Smart says.