Why drama in Washington can't shake optimism on Wall Street

Why drama in Washington can't shake optimism on Wall Street
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Most people are surprised to discover that San Diego is east of Reno. If San Diego is on the west coast and Reno is inland, how can that be? Similarly, most people are surprised to find out that Minneapolis is north of Toronto. Wait, isn’t Canada north of the United States, and isn’t Toronto a Canadian city? How can that be?

The lightbulb goes on when we view a United States map which illustrates the precise geographical locations of these cities, then we say something like, “Oh yeah. I never thought about that but I guess it makes sense.”

Counterintuitive facts pique our interest because they challenge our instinctual logic. We tend to either be skeptical of counterintuitive facts, or inaccurately and sometimes subconsciously, assume an alternative to be true.

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This same concept can be applied to today’s investment climate. Drama in Washington is currently at an all-time high, and many people are outspoken about their discontent with the Trump presidency. Many people also seem disinterested in investing.

But according to UBS Investor Watch, 66 percent of all investors — Republicans, Democrats and Independents — feel confident about the stock market and see the current investment climate as one with potential for high returns.

The same report indicates that 61 percent of all investors see a brighter future for the U.S. economy. With Trump approval rating so low, how can that be? There are several counterintuitive facts that can help us make sense of the results of this research.

First, despite endless opinions and controversy about what our country’s political agenda should be, the fact is that bull markets have historically taken place under both Democratic and Republican leadership. An example of this is taking place currently as the eight-year bull market during the Obama administration has continued during the Trump administration. I’m not suggesting that politics don’t matter. They do. But their influence on the long term performance of the stock market is overstated.

Second, the market can go up significantly during troubling times. This phenomenon is sometimes called “climbing the wall of worry.” An example of this is taking place currently in South Korea. Instinctual logic tells us to avoid investing in South Korea because of instability and possible military action with North Korea, yet the South Korean stock market is up about 25 percent this year.

Third, 56 percent of investors want to put more cash to work. With a political agenda that includes infrastructure development, lower taxes and lower regulation, investors are willing to invest more once they see progress from the Trump administration. Currently 20 percent of investor assets are in cash, so buying power is currently significant. If this cash is invested it can put upward pressure on stocks.

New initiatives, budget cuts, controversy, international threats, tweeting, protests and violence all make for an unsettling environment, and seemingly not one conducive to investing. Instinctual logic tells us not to invest at this time because visibility is low and tension is high, yet the U.S. stock market has continued to climb and is very close to an all-time high. The bottom line is that although it is counterintuitive, the long-term effects of politics on the stock market are exaggerated. In the investment world, the most important factors are fundamentals, economic cycles and profitability.

In my experience advising individuals throughout the country on their personal finances, it is rarely sensible to allow possible outcomes of political events and pending legislation to dictate investment decisions. For a recent example of this look no further than the November election. Hillary ClintonHillary Diane Rodham ClintonGOP rushes to cut ties to Moore Papadopoulos was in regular contact with Stephen Miller, helped edit Trump speech: report Bannon jokes Clinton got her ‘ass kicked’ in 2016 election MORE seemed to be a sure winner.

She intended to enforce and possibly enhance regulatory requirements for the health care and financial sectors. Instinctual logic would tell us to substantially reduce exposure to these sectors prior to the election. Those who took action on that logic, however, missed out on considerable gains subsequent to Trump’s unexpected victory. Speaking of facts that defy our instinctual logic, who broke Babe Ruth’s record of 59 home runs?

Jeffrey A. Swett is a financial advisor with UBS Financial Services Inc., a subsidiary of UBS AG. Member, FINRA/SIPC. UBS Financial Services Inc. financial advisor engaged The Hill to feature this article. As a firm providing wealth management services to clients, we offer both investment advisory and brokerage services. These services are separate and distinct, differ in material ways and are governed by different laws and separate contracts. For more information on the distinctions between our brokerage and investment advisory services, please speak with a financial advisor or visit our website. The views expressed herein are those of the author and may not necessarily reflect the views of UBS Financial Services Inc.