Occasionally I receive a question that cuts right to the core of what many people are thinking. The elephant in the room, if you like.
It happened last week. Jayne H. wrote to me as follows:
“I am a 69-year-old retired dividend investor and dividends are my primary source of income. With the stock market roaring ahead, I have significant unrealized gains. But the worst-case scenario outcome of the U.S. election concerns me.
“We could wake up on November 6th to anything from extreme violence in the streets (possibly leading to a civil war); or a dictatorship; or, simply, the loss of our immense trading relationship.
“Would it be wise to take some profits before the election and lose some dividend payments, understanding that if the worst-case scenario doesn’t happen I will have to buy back in at higher prices, meaning fewer shares and lower income?
“But if the worst-case-scenario does happen, I will have cash in a high interest bank account and, if there is a major market crash and I feel the companies are still strong, I can buy back in at low prices. I have always been a long-term buy-and-hold investor, never jumping in and out, but the political situation in the U.S. is something new.”
I’m hearing this type of concern more frequently. I suggest everyone sit back and take a deep breath. Let’s consider what might really happen on Nov. 6 – assuming we get a definitive result on election night, which we may not. Remember, the Bush-Gore drama in 2000 took more than a month to resolve and was eventually decided by the Supreme Court.
If Donald Trump wins
There may be demonstrations, but street violence is unlikely. The Democrats have strongly endorsed the peaceful transfer of power, and it’s not in Kamala Harris’s make-up to encourage her supporters to storm the Capitol.
Donald Trump may attempt to ensure the Republicans never relinquish power – he has already said he would be “dictator for a day” if he were to take office. So expect a flurry of executive orders if he wins. But a long-term move to an autocratic government would require at least one amendment to the Constitution to delete the two-term limit for presidents. Since any amendment must be ratified by three-quarters of the states, that’s extremely unlikely.
As for the stock market, corporations would welcome Mr. Trump’s pledge to extend and expand the tax reductions he put through in his first term. They’ll also welcome his pledge to cut more red tape, his “drill, baby, drill” approach to hydrocarbons and his tariffs to protect U.S. industry. The stock market is likely to rise, at least in the first few months after the vote.
If Kamala Harris wins
Street violence becomes more probable, encouraged by what’s sure to be inflammatory rhetoric from Mr. Trump and his running mate, JD Vance. It may be messy for a short time, but I think talk of a civil war is hyperbole. It won’t happen.
The stock market will probably take a downturn if Ms. Harris wins. It already looks pricey and set to correct on any excuse. Ms. Harris’s pledge to raise corporate taxes won’t endear her to investors or big business. Neither will the Democrats’ propensity for deficit spending.
Going back to the reader’s personal concerns, I think selling dividend stocks is a bad idea. The prices of these stocks were depressed by rising interest rates as central banks fought inflation. Now that rates are falling again, dividend stocks have been rallying. But many of them still have a lot more upside.
In the short term, I don’t see any reason why the Federal Reserve Board or the Bank of Canada would suddenly turn around and begin raising rates again. The midterm outlook is a little different. If Mr. Trump wins and goes on a tariff binge, it will almost certainly rekindle inflation. That’s when the Fed might change course again, and dividend stocks would suffer.
The bottom line is that the worst-case scenario that is haunting many people is unlikely to happen. So, as the Brits would say, keep calm and carry on.
Gordon Pape is the editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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