As the Presidential Election approaches, many of our clients have concerns and understandably so. We’ve fielded numerous questions about how the markets will react depending on who gets elected. This is a sensitive subject to approach, and we’ll stay away from opinions in general, however, it’s important to separate personal and political feelings from financial plans and investments.
Is the current political environment more contentious than any we’ve seen in prior history? There’s no way to quantify that, but what isn’t in question - the ability to distribute information quickly to the masses has never been greater. Twitter, Facebook, Instagram, etc. can be great tools to connect with friends, family, your favorite artists or sports team but they also provide a platform for propaganda. Information (often better termed ‘opinions’) can be spread quickly and there certainly appears to be more emphasis on being first, than there does on being right. More often than not, social media is conducive to extreme, emotionally charged content rather than rational, principled discourse. A well-thought perspective often leads to name-calling and bruised feelings. To think that America hasn’t experienced divisiveness over the course of its history would be inaccurate, but there was more of an ability to “escape” from it, than there is in the technological age we now live.
Long-term investors should be wary in reacting to what the effect one candidate or another will have on the financial markets. Looking back a little more than 4 years ago, initial reactions from the markets to Donald Trump’s election in 2016 were decidedly negative, however the Dow and S&P 500 quickly reached new highs by the end of that year and rallied until the Covid-19 crises. The common opinion among political analysts is that with a Biden win, there is an expectation of higher tax rates and increased government regulation, which could negatively impact corporate profits. However, these analysts also believe a potentially less confrontational stance on China, and investment in clean energy and infrastructure could be considered positives. If Trump stays in office, you should expect tax rates to remain low and regulation to be minimized - which could give a continued rise in our economy from pre-Coronavirus times.
So, how has the S&P 500 (excluding dividends) fared during presidential terms?
Throughout history and dating back to the mid 1930’s, gains or losses in the stock market can be driven by factors outside of the respective administration’s control - i.e. WW2 and 9/11. Considering this, returns have been fairly similar between both parties and regardless of who is in office, the stock market has fared well over the long term.
One factor neither candidate has control over is the interest rate environment. Today’s historically low interest rates, which are expected to remain low for the foreseeable future, are a boon to the equity markets. First, they allow businesses to finance their operations and expansions at lower costs thus increasing their earnings potential. Consumers are more likely to buy more expensive houses, remodel existing ones or buy a new vehicle in a low rate environment. Additionally, lower rates make it difficult to find safe, decent yielding investments with fixed income, CDs and money market funds. Investors seeking yield are more apt to head to the equity markets. Financial markets are driven by many factors outside the control of politicians, such as supply and demand (domestically as well as internationally), monetary policy, geopolitical events and exchange rates.
It can be a dangerous game to attribute the results of the financial markets (positive or negative) to one individual. Economic health and expectations for future success are a melting pot of factors, many of which are out of control of the President. One could make the case that the Federal Reserve Chairman, Jerome Powell and the monetary policies he oversees, has the most impact on the financial markets.
Regardless of Covid-19, social unrest, the election, etc. our advice is to have a defined strategy, stay with it and don’t deviate based on the environment surrounding us. Update and adjust your investment strategy should your own goals change. Timing when to invest and when not to invest is more akin to speculation, which by definition is - “investment in stocks, property, or other ventures in the hope of significant gain but with the risk of significant loss”. The traditional idea of having an appropriate asset allocation strategy (your portfolio’s mix of stocks, bonds...etc) for your specific risk appetite is still sound advice. Deviating from your long-term strategy based on guessing the market’s reaction to a specific event can lead to unintended consequences.
If you have questions or concerns about your individual situation, please don’t hesitate to contact us.