This year will close with two momentous events in the United States and Europe. In this country, for the first time ever against an elected president, the Senate will consider articles of impeachment voted by the House of Representatives.
Across the Atlantic, 11 members of the European Union are preparing for the Jan. 4 start of a common currency, the euro, paving the way for the end of their national currencies in three years, a venture never tried on such a huge scale before in history.
Markets may react in the short term to both of these developments. Institutional investors, supposedly concerned with the long term, should not. They should consider the long-term investment implications of these developments and position their funds to take advantage of them.
Both the impeachment trial in the U.S. and the move to a common currency in Europe are monumental and risky undertakings, although completely unconnected. The reaction of the markets to them is uncertain and, if adverse, could cost institutional and individual investors around the world billions of dollars in (mostly) short-term losses.
That has pension fund and other investors concerned, as it should. But their concern should be about any long-term effects, not the short term.
And institutional investors should not allow their personal views on the issue to influence their long-term investment decisions.
Rather, they should be considering whether long-term economic implications will arise from the vote and the Senate trial. For example, will the trial in the Senate impede the passage of legislation important for the improved functioning of the economy? What would be the long-term impact if the Senate voted to remove the president from office? How likely is that? What if the Senate voted not to remove him from office? How effective would the president be then? What are the long-term investment implications of a weakened, or strengthened, president? These are the questions with which institutional investors should be wrestling.
Then they should position their portfolios accordingly.
Investors certainly have their own opinions over whether the charges are serious enough offense to justify removal from office, but they should not let those opinions direct their investment decision-making.
In Europe, the euro will, as intended, have a direct effect on the capital markets. The euro is designed to foster greater economic stability, greater transparency and comparability in prices and asset values and performance benchmarks, thus broadening markets and increasing competition, benefiting consumers and businesses.
For U.S. institutional investors the questions are:
Will the euro be a long-term plus for the U.S. economy and markets, or a negative? Will it stimulate enough additional demand to accelerate the world economy so European and U.S. markets both prosper, or will a more competitive Europe make life more difficult for U.S. companies? How should long-term portfolios be positioned?
While they might be engaged or enraged by the events in Washington, and comforted or concerned by the events in Europe, institutional investors should put their personal feelings and opinions about the appropriateness and wisdom of those events aside when investing. They must focus on the long-term economic and investment implications.