With the stage set for the presidential election in November, some investors may be concerned about the impact of politics on the stock market and economy. After all, the 2016 presidential election resulted in large market swings, and the political climate is arguably more polarized today. How should investors react to what may be a bitter campaign? Should investors fear either party winning the White House? Is it best to sit on the sidelines until the dust settles?
As citizens, taxpayers and voters, elections are extremely important. This is true regardless of which side of the aisle you’re on and which candidate you support. Your vote helps to determine the principles that will be upheld by the country in the years to come.
Be Wary of Claims that One Political Party is Better for the Market
However, it’s important to separate these personal and political feelings from our finances. When it comes down to it, long-term investors should be wary of claims that one candidate or another will “kill the market” or “ruin the economy.” It’s likely that this has been said about all 14 presidents since 1933 (7 from each party).
For instance, this was certainly said about both Presidents Trump and Obama. In 2016, markets plummeted overnight when Candidate Trump became President-elect Trump only to then reach all-time highs by the end of the year. The stock market has continued to rally, even in spite of the COVID-19 crisis.
Similarly, during the 2012 midterm elections, political pundits focused on the Affordable Care Act (“Obamacare”) and how it would burden the economy and act as a drag on the stock market. An investor who bought on election day in 2012 and held until election day 2016 would have experienced a 63% total return, or roughly a 16% average annual return.
Overreacting to Politics Can Make You Miss Out on Growth
Throughout these examples and more, investors who over-reacted to politics rather than the underlying economic facts would have missed out on significant portfolio growth.
This doesn’t guarantee that either candidate has sound economic plans or suggest that their policy proposals and values don’t matter. Government policy can certainly have an impact on growth, e.g., through corporate taxes and trade, and can also affect specific stocks, bonds, and sectors. However, for most long-term investors who hold diversified portfolios, it makes more sense to focus on economic and market fundamentals rather than day-to-day election coverage.
Returns are Similar Under Both Parties Since 1933!
This is because the relationship between politics and the stock market is not a simple and obvious one. While there may be conventional wisdom about how each political party may affect the economy, these views actually have a poor record when it comes to predicting stock market returns. Not only is economic policy difficult to evaluate, implementing and enforcing such policies take time. And even when investor predictions are correct, the market tends to price in these facts well in advance.
Chart: Annual price returns for the S&P 500 since 1933 under Democrat and Republican presidencies. Both sets of returns are positive and differ very little when making realistic adjustments for the policymaking process.
For instance, one reason for a significant surge in the stock market after 2016 was a recovery from the corporate “earnings recession” of 2015-2016. Similarly, one reason the market performed so well after 2008 and 2012 was that it bounced back from the global financial crisis, Eurozone crisis, and other problems along the way. It’s not a stretch to argue that these macro trends would have driven markets irrespective of which party controlled the White House.
Focus on the Fundamentals
More importantly, even if there is a large difference in stock market performance, it’s clear that returns are positive under both parties. History also tells us that market returns are positive on average during election and non-election years alike. Jumping out of the market due to the outcome of an election, or simply because an election is occurring, is not a decision supported by history.
Thus, the best course of action for long-term investors, regardless of political preference, is to stay invested and maintain the discipline to keep our political and financial lives separate.
Last Updated September 30, 2020