As we prepare to ring in the New Year, 2016 is positioned to be a year of unknown risks, both economically and politically. Recently global terror has dominated the news cycle, with the attacks in Paris sparking some of the strongest security concerns in 15 years and new threats emerging each day. Terror threats like these form an atmosphere of uncertainty and heightened political risk, especially heading into a U.S. presidential election year.
The 2016 presidential race is a source a great uncertainty in and of itself. In the last 100 years, the stock market has returned only a 2.1% average return during open (no incumbent) presidential election years. Markets historically do well when there is gridlock in Washington, particularly when it’s a Democratic president facing a Republican Congress, like our current situation. This election could very well alter that dynamic.
Furthermore, the debates have featured two parties with radically different visions for the future of America, and while voters might want change, markets are generally fickle to major policy changes and their inherent risks.
The New Year will also be full of economic unknowns. This U.S. economy is not moving at the pace most would hope following a seven-year recovery. Oil is low, inflation is not in sight and the Fed is under a great deal of pressure to begin raising interest rates despite concerns over the strength of the economy.
What does this mean for investors? This atmosphere of uncertainty is likely to create short-term market volatility throughout 2016. And that raises another question: which strategies are best suited to weather a year full of ups and downs? Evidence shows that those who take a long-term, low volatility approach to the markets have reasons to be quite optimistic.
To position a portfolio for a successful year, investors may adjust their thinking from short-term to long-term and look to a strategy with less vulnerability to these mounting economic and political risks. In a climate like this, low volatility strategies are primed to do well.
The coming year will likely be a rollercoaster ride, so investors should buckle up with a plan that’s low-risk and focused on the advantage of future volatility.
David Harden is President and Chief Investment Officer at Summit Global Investments, an SEC registered investment adviser specializing in low volatility investment strategies.