How Presidential Elections Affect the Stock Market
With the presidential election season heating up, there will no doubt be a flurry of daily headlines between now and election day on November 5. A rematch between Joe Biden and Donald Trump seems inevitable with Trump currently leading many presidential polls among registered voters while Biden is raising and spending more campaign funds. Although a lot can happen between now and November, it’s natural for some investors to be concerned about the impact of politics on the stock market and economy. After all, the political climate has never felt more polarized not just due to elections, but also disagreements in Washington around the budget, immigration, foreign policy, and more. How can investors stay balanced during this year’s presidential election?
The stock market has performed well under both parties
Presidential voting plays a pivotal role in determining the principles upheld by the country in the years ahead. However, when it comes to our investments, 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 every president in modern times across 15 presidencies since 1933 (7 republicans and 8 democrats), and was certainly said about Obama, Trump, and Biden. Thus, it’s important to separate personal and political feelings from financial plans and investments.
The accompanying chart highlights the broad fact that the economy and stock market have performed well across both parties. Focusing too much on who was in the White House would have resulted in poor investment decisions over history, regardless of how strongly one felt. For example, from 2008 through 2020 across the Obama and Trump administrations, the S&P 500 generated a total return of 236%. This occurred despite the vast perceived differences between the parties and the increasing polarization of Washington politics. This also occurred despite many budget battles, fiscal cliffs, debt ceiling crises, U.S. credit rating downgrades, etc., not to mention the global financial crisis, the pandemic, and more.
Of course, this is not to say that good policy doesn’t matter. Policies on taxes, trade, industrial activity, antitrust, and more can have important impacts on specific industries which can then affect the broader economy. However, not only do policy changes tend to be incremental, but also history shows that it is very difficult to predict how any particular policy might affect the economy and markets, despite conventional wisdom about each party. Stock prices account for new policies quickly and companies and industries tend to adjust and adapt.
The business cycle matters much more than who is in the White House
This is why for most long-term investors, it makes more sense to focus on fundamentals such as those related
to the business cycle, rather than day-to-day election coverage. On a short-term basis, election headlines have the power to move markets and create stock market volatility. However, these moves are eclipsed by the long-term gains created by market and business cycles. These cycles are influenced by many factors, from technological revolutions to globalization, and not just who is sitting in the Oval Office. The reason the returns since 2008 have been historically strong, with the market now back at all-time highs, is less about Obama, Trump, or Biden, than the underlying economic trends.
Stock market returns are positive on average across both parties
For those who are unconvinced that they should avoid day-to-day political headlines when it comes to investing, the final point is that average stock market returns have historically been positive under both parties. To underscore this point: it is not the case that markets always crash under one political party.
The accompanying chart shows that no matter how you slice it, the S&P 500 has averaged double-digit gains whether democrats or republicans are in the White House. Additionally, history tells us that market returns are positive on average during election and non-election years alike. While the past is no guarantee of the future, and returns in any individual year are unpredictable, 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.
The bottom line? The best course of action for long-term investors is to stay balanced and not make investment decisions based on political preferences.
Continue to watch our updates for more investment and financial strategy advice. If you have further questions, email us at PrivateWealth@clarienbank.com.
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