The Separation of Politics and Portfolios

Like in most election years, people are very passionate about who they support and who they want to win. This year is no different as people’s emotions are running high. They also have strong opinions on what this will mean for the economy and stock market. It’s okay for us to feel the way we do because that’s what makes us human. It is perfectly normal to address these emotions, but we also need to realize that people can make costly mistakes when making decisions clouded with emotion. That is why it is extremely important to remove emotion from investments, and to make practical decisions based on real data.  Rather than promote one particular party or platform, this is being written to provide evidence-based data.

What have we seen from other elections that can give us perspective?

We always hear that markets don’t like uncertainty, so let’s look at other election years to see what it’s meant for the markets:

• Since 1926, there have been 23 presidential elections.

• During the years in which there was a presidential election, the market has had an average return of 11.3%.

• The average annual return of the SP500 over its history is 9.7%, so this is not vastly different than non-election years

• Of these 23 election years, 19 have been positive, and 4 have been negative.

If we peel back the onion on the years the market was down, we can see a common theme that there were also much bigger issues at hand:

• 1932 FDR vs. Hoover: -8%, Worst year of Great Depression.

• 1940 FDR vs. Willkie: -9.8% Germany invaded France

• 2000 Bush vs. Gore: -9.1% Contested election coincided with dot com bust

• 2008 Obama vs. McCain: -37% Global Financial Crisis

Elections are not the primary driver of stock market performance. Politics and elections are “A” variable, but not “THE” variable. There are many more variables that come into play. This is the opposite of what you hear on TV. CNN is going to tell you one thing, and Fox News will tell you another. This does not take away from the fact that markets will be volatile around the election, but we need to put it into perspective.

Think of when you throw a rock into a pond.  The ripple is very big where the impact is, but as you move away, the ripples become smaller and smaller and then after time, you start to no longer see them. Investing in the stock market is the same and should not be reflected in days, or weeks but more so a LONG-TERM APPROACH.

Certain ideas sound good conceptually (like moving to cash for the short term, buying certain stocks based on the winner of the election) but they are not usually the best idea. Markets have already adjusted accordingly. If you are thinking of moving money out, this is the easy decision. But then you have to choose when to also invest again. The stress of being in the market is essentially just being replaced by the stress of being out of the market. This is why having a financial plan in place is essential. Your financial plan should be built to survive times like this. Having the education about the way markets work and a financial plan in place, is the bedrock in withstanding temporary setbacks.

Republican vs Democrat- Does it actually matter for the stock market?

Average annualized returns show there is no apparent pattern whether republicans or democrats are better for the stock market. Whether or not the stock market goes up or down is more heavily determined by other outside factors.

Take a look at George W. Bush. He walked into office right as the Dot Com crisis was about to unfold in 2000. September 11th also happened during his tenure, and then at the end we experienced the financial crisis in ’08. Other presidents have been fortunate to have had good timing/circumstances. Take Bill Clinton for instance - he happened to be in office when large tech giants were originally formed, and the market experienced really good performance. Richard Nixon went off the gold standard and there was also the Oil Crisis in 1973.

This is why the data suggests presidents should receive neither blame nor credit and it is not as tied to one party as we might think. Markets are driven by so many bigger things than who controls the White House.

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Tax Policy

We can also look at tax policies since this is another hot topic in this election. In any situation, there will be pros and cons:

• Companies like lower tax bills so they can pass more income to shareholders. We saw that a few years ago with tax cuts.

• Prior to tax cuts, companies were creating subsidiaries in lower tax countries to boost performance. If there are changes to tax law, companies will adjust as necessary.

Let's look at the presidents with tax cuts:

• Ronald Reagan: Significant reductions in tax rates, stocks tripled in 8 years.

• George Bush: 2 rounds of tax cuts, $1 invested during his term would have declined to $0.70.

So WHATS THE MORAL? Tax cuts DO NOT guarantee successful outcomes. If you look at Reagan and Obama in the above graph - one president was known for tax cuts, and the other one for Obamacare. Two opposite ends of the spectrum, yet over their tenures they delivered virtually identical growth in someone’s wealth.

Control of Congress

People are also overly concerned about if one party takes over the White House, Senate and House all at once. This is called unified party control. Everyone has their strong opinions on how the world will ‘flip upside down’ if the opposing party ends up getting full control. So what has happened over history during times of unified party control?

• Republicans have had unified control 13 different years - Average return: 14.52%

• Democrats have had unified control 34 different years    - Average return: 14.52%

The average annual return is IDENTICAL down to the second decimal! And this is why we have to be cautious of guessing or predicting the market as it can lead to a significant opportunity cost. There is no data there to suggest whether one is better or worse for the market. This is simply removing emotions from the equation.

There can be plenty of conversations and debates around which party/policy will be better for the country; however when it comes to the market - it's important to look at the data. The evidence shows that it does not vary all that much when it comes to its effect on the stock market.

What we do know....

• Stocks have rewarded disciplined investors through Democratic and Republican presidencies

• Markets reward LONG TERM INVESTORS.

• Timing the market can have repercussions

• Have a financial plan in place and stick to it in times of distress

• Lastly, keep the politics out of your portfolio

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For more information, download the PDF at the link below.

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