With the U.S. presidential election just around the corner, it’s important for investors to remember what affects markets in the long run. While our votes should reflect our personal beliefs and preferences, whatever they may be, history has shown that it is best for our portfolios to stay out of politics.
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Keep Politics Out of Your Portfolio
In the long run, the stock market and economy have grown under all types of leadership. There may be occasional short-term hiccups but trying to “time the market” around such events often causes more harm than good. In recent years, the Mueller investigation, impeachment vote, the Affordable Care Act, and more were expected to cause sustained stock market volatility. In nearly all cases, the market shrugged off the result and moved on.
This is not to say that the stock market only goes up. On the contrary, when the stock market does decline during corrections and bear markets, it is often because the underlying fundamentals of different sectors and companies or actual market conditions have deteriorated.
In the long run, trends in technology, finance, globalization and others have a more pronounced impact on stocks and sectors. These tend to be independent of who’s in office and may last for decades. For example, the trend around information technology, the internet and digital transformation that exploded in the 1990s is still ongoing today.
Should Individuals Prepare for Higher Tax Rates?
The primary issue is that it is often hard to separate our political feelings from our investment ones. It’s understandable that this is the case since Washington politics and legislation do affect our personal lives.
Individual income tax rates, for instance, have been falling since the mid-20th century. High-earning taxpayers in the mid-1940s may have paid a rate as high as 94% on their marginal incomes. Even those in the lowest bracket would have paid 20% or more during the 1940s, 50s and 60s — that’s double today’s rate.
Chart: Individual income tax rates have been much higher historically. The stock market performed well even during these periods.
While few would like to or even expect to see tax rates return to these levels, it’s undoubtedly the case that taxes are currently low by historical standards. From this perspective, planning for higher rates in one’s personal finances may be prudent.
Markets Have Performed Well Under a Variety of Tax Rates
From an investment perspective, however, the stock market and economy have historically performed well under a variety of tax regimes. The Post-WWII boom, which occurred during these exceptionally high marginal tax rates, witnessed several bull markets.
Thus, there are many ways in which politics matter. However, when it comes to markets and investment portfolios, there are a variety of factors that likely play a bigger role.