With the presidential election season heating up, there will no doubt be a flurry of daily headlines between now and election day, and it’s natural for some investors to be concerned about the impact of politics on the stock market and economy. How can investors stay balanced during a presidential election year? As citizens, taxpayers, and voters, elections are extremely important regardless of which side of the aisle you’re on. Your vote helps determine the principles that will be upheld by the country in the years to come.
However, when it comes to 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, so it’s important to separate personal and political feelings from financial plans and investments.
The broad fact is 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 two very different 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, and despite budget battles, fiscal cliffs, debt ceiling crises, 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. However, policy changes tend to be incremental, and history shows that it is very difficult to predict how any particular policy might affect the economy and markets.
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 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 volatility. However, these moves are eclipsed by the long-term gains created by market and business cycles.
This is perhaps best illustrated by the 1990s and early 2000s, when a presidency happened to be timed perfectly with the information technology boom while the ensuing dot-com bust coincided with the start of the next administration. Despite this, it would be a stretch to argue that presidencies were the reason for these booms and busts—these events had much more to do with technological and financial innovations.
Stock market returns are positive on average across both parties.
History tells us that market returns are positive on average during election and non-election years alike. Jumping out of the market due to the outcome of an election is not a decision supported by history.
The bottom line? History tells us the best course of action for long-term investors is to not make investment decisions based on political preferences.
-Paul R. Rossi, CFA