Politics has always been a source of headlines, and with social media, headlines are hard to escape. The current political climate complicates this issue and has raised concerns for many investors. How do they separate the noise from factors that could impact their financial plans? How can political factors affect investments?
Government Spending
Where governments spend their money affects companies. Some spending decisions require outside help in the form of government contracts, a significant business. Companies that secure these contracts can become more attractive to investors, much like any company that secures a large contract.
A government can also stimulate its country's economy by issuing stimulus cheques to citizens. This is typically done when there are concerns about the country’s economy stagnating. The idea being that if you give people money, they will keep businesses going by spending more. However, too much can contribute to future inflation as prices can rise due to increased demand and customers' increased cashflow.
Policy Changes
Policy Changes can affect how Canadians spend and save, changing investor strategies and tools. Examples include capital gains tax inclusion changes, changes to income tax brackets, the creation of new investment accounts such as the FHSA, and tax incentives or breaks.
Trade Deals & Tariffs
Many governments around the world have been working to secure new trade deals recently. Trade agreements promote commerce between countries, thereby supporting businesses and their stock values. That is why they are highly sought after and attract attention.
Tariffs are a type of tax implemented by a government on its domestic companies when they import specific items from another country. Governments implement tariffs to either protect domestic industries from foreign competition or to act as a tactic in trade negotiations. Tariffs stifle trade by increasing the cost to bring a product to store shelves. Either the companies or the end buyer ends up eating the cost increase this creates, which impacts profit margins. When profits change, investor perception shifts. (For more information on: How Canada’s imports and exports have changed since Trump | CBC News).
Investor Confidence
Confidence is often based on feeling rather than fact and is, therefore, difficult to track and nearly impossible to predict. Investor confidence significantly affects stock valuations. Investors tend to stay or buy when they’re happy and sell when they’re fearful. However, it’s challenging to pinpoint when these feelings lead to action.
Political turbulence is one factor that affects investor confidence. When negative political rhetoric and trade war talk dominated headlines earlier this year, the markets dropped. However, as time passed, investors grew more resilient, leading to a market rebound. It attests to the fact that people change their minds and sometimes quite quickly.
Government actions can affect your financial plans. However, it’s best to focus on long-term goals over short-term headlines. If concerned, discuss current events and your financial plan with your advisor.
For more insight into your portfolio, contact us at KLT Wealth Management.
~ Courtney Beach, QAFP
