Brokerages are companies that act as middlemen to buy and sell stocks, bonds, and other financial products for their customers. A president-elect does not directly impact how well (or poorly) your stocks, bonds, and other assets perform. However, the president-elect does play an indirect role in the health of these investments. A president's actions and policies start a ball rolling that can ultimately affect your portfolio. Here's how that works.
The president-elect and the Federal Reserve
The Federal Reserve (typically referred to as the Fed) is the U.S. central bank, and its main mission is to keep the U.S. economy stable. One of the ways it does this is by setting the federal funds rate. This is the interest rate financial institutions use to borrow from and lend to each other. Because the rate affects the costs of running a bank, it also impacts the rates we can get on our loans, savings accounts, and mortgages.
When the economy is sluggish, the Fed lowers the rate to stimulate growth and help avoid a recession. A low federal funds rate enables businesses to, for example, borrow money to purchase new equipment, hire new employees, and expand. When the economy is red hot and growing fast, the Federal Reserve may raise the federal funds rate. That can slow things down -- it's generally used to stop inflation from getting out of control.
The Federal Reserve is designed to be independent of politics. As such, the president-elect has very little impact on its decisions. The president does nominate members to its board of governors, and -- technically at least -- can remove the chair if there's just cause. This has never happened.
The Fed uses all kinds of economic indicators to decide whether the federal funds rate should be raised, lowered, or remain the same. One such indicator is the newly-elected president's policies. The Fed will consider the president-elect's economic proposals, how likely they are to be supported by Congress, and how the economy might be impacted.
How changes in the federal funds rate can impact brokerages
Here's where the road gets a little bumpy. Brokerage accounts allow you to put your money into stocks, bonds, mutual funds, and other types of investments. Changes to the federal funds rate may have an effect on those investments.
The federal fund rate influences, and is influenced by, the stock market, but it is only one factor of many. For example, despite high employment rates and the economic fallout from the coronavirus pandemic, the stock market did not free fall. And that's partly due to low interest rates. The point is this: Historically, changes to the federal funds rate have driven small brokerage account gains or losses, such as the current stock market behavior during a once-in-a-lifetime pandemic.
Conventional wisdom has it that low interest rates lead to a bull market, or an increase in stock value. According to January minutes from the Federal Reserve, though, there is no such cause and effect. Economists studied the history of stock prices following changes to the federal funds rate and concluded that the impact is "modest relative to the historical fluctuations in those measures."
In other words, the largest bull markets have not been due to changes in the interest rate, and neither have the deepest bear markets.
So, what about bonds? It's safe to say, when the interest rate drops, bond prices rise. As debt securities, bonds are similar to IOUs. Let's say you hold a bond with a high interest rate. The federal funds rate drops and the interest rate on other fixed-income instruments, like Treasury bills, falls. The bond you bought at a higher interest rate is suddenly worth more to investors because it's earning more money than other fixed-income instruments.
What should I do if I'm concerned about my brokerage account?
Following a rate change, some financial instruments traded by a brokerage become more valuable, and some less so -- for a time. However, history also shows that values even out (and increase) over time. That's why it always makes sense to invest for the long term.
If you plan to hold the stocks or bonds you buy through a brokerage, you don't need to worry about short term ups and downs. Those who resist reacting to every hiccup on the market will end up with the most valuable portfolios.
What to consider if you're looking for a brokerage firm
There are many brokerage firms willing to handle your trades. The trick is to find one that best meets your needs. Before opening a brokerage account, ask yourself the following questions:
- Does this broker specialize in the kind of trading I want to do? For example, if you're a buy-and-hold investor, a traditional brokerage might be right for you. If you are saving for retirement, an IRA that offers tax benefits might be a better route.
- How much are this broker's trading fees? There are a lot of things about trading you cannot control. How much you pay your broker is a controllable cost. Many online stock brokers offer zero-commission trading and affordable account minimums.
- What kind of research tools does this brokerage offer? If you like to do your own research before putting skin in the game, you'll want a brokerage that provides those resources.
- How is customer service? While it doesn't sound like the most critical factor in choosing a brokerage, customer service can be key. Find out their available hours and figure out if that works with your schedule.
- What other services do they provide, and are those services something I care about? For example, if you would like someone to advise you, look for a brokerage with an investment advisory service. If you're hoping for a brokerage that also offers banking services, make sure the brokerage firms in the running provide bank accounts.
The bottom line
The president-elect can affect brokerages and your investments in several ways.
The president's policies and overall political climate can impact investor confidence and other economic factors, which can in turn drive share prices up or down. The Federal Reserve takes those into account when it sets the federal funds rate, which can also play a modest role in what happens to your investments.
However, the president and the federal fund rate are only two of many elements that affect the performance of your brokerage investments. Other factors include: How well the economy is doing overall, unemployment rates, inflation, market regulation, and individual trends in the industry. And of course, unexpected events such as terrorist attacks can also threaten economic stability and shake the stock market.
Blaming the ups and downs of the market on a single issue is like blaming the wind for a tornado. Many elements determine how a tornado is formed, just as many elements determine how robust the market. But if you invest for the long term in a diverse and low-risk portfolio, you can be confident about building wealth for the future.
