The world watches as the U.S. political “market” struggles through one crisis after another: a contentious election, debt ceiling debates, fiscal cliffs, spending sequestration.
At the same time though, capital markets are performing remarkably well. The S&P 500 is up more than 27% in the past 12 months (through May 2013). In fact, both the S&P 500 (large companies) and the Russell 2000 (small companies) achieved historic highs during May. Stock markets overseas are rising too.
For many investors, this is confounding. How can capital markets do well when the political climate—and the questioned competence of political leaders—seems so dismal? (Gallup indicates that 85% of Americans now disapprove of how Congress is doing its job!)
It’s helpful for individual investors to remember they’re investing in companies, not governments. Companies are constantly trying to maximize profits regardless of economic and fiscal realities. Consider also the historic resilience of capital markets. Two examples: European markets reemerged after two world wars. U.S. capital markets survived the Great Depression of the ’30s and more recent downturns of 2007–2008.
In fact, free capital markets have become more prevalent in parts of the world that previously attempted to rely on government controls. China may be the most recent and compelling example.
Consider this: Again, as investors we are buying shares of companies, many of which will find ways to adapt to current political and fiscal climates, no matter how hostile. Certainly, some companies will fail, and shareholders in those companies will lose money. However, new businesses will emerge and flourish, whichever way the economic winds happen to be blowing.
Capital markets have always provided opportunities and rewards to diversified, long-term investors. So, try not to let your views of the prevailing political climate be the primary consideration regarding your investment strategy. Stay diversified.
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