The Election Myth

By Steven Higgins, Financial Advisor, Principal

One of the most challenging aspects for investors focused on long-term goal planning is to dissociate their emotional reactions to politics from practical decisions relating to their investments.  Every time we run the gauntlet of a presidential election year, we are bombarded with rhetoric emanating from either party’s political playbook lambasting the opposition and foretelling of economic doom if “the other” party were to prevail.  Following the financial advice and threats from zealous candidates bloviating from the bully pulpit has been comically wrong, as history tells us there is no basis for believing that one political outcome over another leads to more prosperity or peril.  Nevertheless, there will be many who fall for the story and allow their political inclinations to permeate the thin wall between politics and finances.

At Higgins & Schmidt we urge balance and caution throughout market cycles and also election cycles. Our investment process is designed to moderate risk and seek growth by adhering to time tested rules of diversification, acknowledging economic realities, and taking advantage of tactical opportunities. Allison Schmidt wrote about our investment process throughout 2023 in part one of our series in January, “Behold, a Recovery.” In part two of the series, “Beware, a Cautious Climb Continues” I explored key threats an investor might face as we move forward. Headlining the list of cautions was the challenge of politically triggered emotions impacting personal investment decisions and, ultimately, outcomes. As part of my own studying with a research firm that we partner with, Clearnomics, I came across this article, “How Presidential Elections Affect the Stock Market.” I found a lot of consistency in the data with what we have already written about and I believe it’s strong complement to our narrative. With the permission of Clearnomics, I’ve included the article below along with charts. 

For those in need more brevity, I’ve provided what I feel are the most important takeaways for our clients.

Historical Performance Across Parties: The stock market and the economy have historically performed well under both Republican and Democratic administrations. Long-term investors should not base investment decisions on claims that a specific candidate will negatively impact the market or economy. For instance, from 2008 through 2020, the S&P 500 saw a total return of 236%, despite significant political differences and economic challenges.

Separating Political and Financial Decisions: Investors are urged to vote in elections based on their political beliefs but to make investment decisions based on financial considerations, not political preferences. The article highlights that focusing too much on the occupant of the White House has historically led to poor investment decisions.

Importance of Policy and Business Cycle Over Politics: While policies can impact specific industries and, by extension, the broader economy, the article argues that the business cycle and fundamental economic factors play a more crucial role in market performance than short-term political developments.

Positive Returns Regardless of Political Party: The article presents data showing that the stock market has historically provided positive returns, whether under Democratic or Republican presidencies. It concludes that making investment decisions based on political outcomes or preferences is not supported by historical trends. 

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 

As citizens, taxpayers, and voters, elections are extremely important 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. 

However, when it comes to our investments, it’s important to vote at the ballot box and not with our hard-earned savings. 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 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 crisis, 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. 

This is perhaps best illustrated by the 1990s and early 2000s. Bill Clinton’s two terms were perfectly timed with the information technology boom while the ensuing dot-com bust coincided with the start of the George W. Bush presidency. Unfortunately, the 2008 financial crisis also occurred at the tail end of George W. Bush’s second term, resulting in his presidency encompassing both market crashes. Despite this, it would be a stretch to argue that their presidencies were the reason for these booms and busts. While policies influenced these events, they had much more to do with technological and financial innovations. These and other historical episodes suggest that presidents often receive too much blame and credit for economic conditions. 

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. 

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Higgins & Schmidt Wealth Strategies, a registered investment advisor and separate entity from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification and asset allocation does not ensure a profit or protect against a loss. Stock investing involves risk including loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or pro-tect against a loss.