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Quick Thought Of The Week: Politics

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The US midterm elections are now over. The Democrats have seized control of the lower house, while the Republicans have retained a majority in the Senate.

Although the outcome had been widely predicted – long before the first vote was even counted – the market still wanted certainty before it would commit its money to shares.

But once the final make-up of the US political system was known, stock markets rocketed. The Dow Jones Industrial Index jumped more than 2% on the election result. The Straits Times gained 1%, and the Nikkei put on nearly 2%.

Is that really how we should approach investing for the long term? Should we let politics dictate the way we commit money to shares?

If we do allow the political tail to wag the investing dog, then we are going to be faced with another dilemma: Will a split Congress be good or bad for shares?

Will the US political system now be stuck in gridlock, as some have suggested, as Democrats thwart White House ambitions for even more tax cuts? Or could US politicians on both sides of the divide find some common ground in repairing America’s crumbling infrastructure, which needs more than just a lick of paint?

How will the Federal Reserve respond to either of those scenarios? Will it be more or less aggressive with interest rates?

These and other permutations and combinations of possible outcomes will be ruminated over in the coming months. So, are we going to wait for absolute clarity before we buy shares. Some undoubtedly will.

That is a good thing. But it is also the wrong thing to do.

It is good because It means that the wall of worry is still in place. So long as investors are worried, it means that shares won’t be overpriced.

But to wait for total clarity would be the wrong thing to do. The future is never clear. If the consensus is cheery, then we are likely to pay a high price for shares. What we want is uncertainty. It is the friend of the long-term buyer of value.

A version of this article first appeared in Stock Advsior.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.