March 10, 2020
3 Things to Keep in Mind About Your Investments Going Into the 2020 Presidential Election
Please read important disclosures and index definitions HERE
March 10, 2020
Please read important disclosures and index definitions HERE
It’s 2020, which means that the financial industry’s favorite animals — bears and bulls — have to share the stage with donkeys and elephants.
Or do they?
It’s already been a long primary season, and we have many months to go before Americans (finally) know which Democratic candidate will secure her or his party’s nomination. That, of course, is still only the tip of the iceberg.
The Democratic National Convention is scheduled to take place in Milwaukee, Wisconsin, beginning July 13, meaning that rather than crossing the finish line, we’ll have more than three months of suffocating campaign ads, 24-hour news coverage, and ever-emerging poll numbers to look forward to between mid-July and election day on Tuesday, November 3.
Besides the 2020 presidential election’s impact on your psyche, this year’s political festivities might also raise some other questions for you, specifically around how your investments might be affected by what’s going on in Washington, D.C. You’re not alone. Over the years, countless articles (including this one 1) have been written about the subject, as well as a couple of books.
Rather than dive into the candidates’ specific plans (or lack thereof) regarding buzzword campaign issues revolving around things like taxation, Medicare for All, and a Green New Deal, it’s important to focus on the big picture.
As such, there are three important things to keep in mind going into a presidential election, all of which should give you some peace of mind about your investment portfolio.
Much of the narrative regarding the intersection between presidential elections and Wall Street revolves around this question: who’s more likely to spook the stock market, Democrats or Republicans?
First, it’s important to note that Wall Street doesn’t like uncertainty. Unfortunately, in the long lead-up to presidential elections, there’s a lot of uncertainty.
Who will secure the party nomination? What campaign promises will she or he make? Will a third-party independent make it on the ballot? Was that Facebook ad real or fake? Did you see so-and-so’s latest tweet?
However, the thing to remember regarding uncertainty, at least in the case of presidential elections, is that it’s less about political parties and more simply about not being able to predict the future. Neither Democrats nor Republicans are good or bad for stocks.
Consider this: in the 23 presidential elections 2 that have taken place since 1928, the S&P 500 Index experienced a loss during the election year only four times (in 13 of those elections, an incumbent was seeking reelection), and with the exception of recession years, stocks tend to go up once the president-elect is announced, despite the campaign winner’s political affiliation. If that weren’t enough, consider that in a frequently cited 2004 study 3, Federal Reserve economists Sean D. Campbell and Canlin Li found that since 1852, market returns don’t track with which party wins presidential elections. That assessment mirrors a Vanguard study 4 that showed that between 1853 and 2015, when comparing which party captured the executive branch, average annual returns were basically identical.
To sum it up, here’s a quote from Ron Rimkus, CFA, who wrote a blog post 5 back in 2012 about this very subject:
“Oftentimes, we hear pundits ask: What US presidents were good for the stock market? How did the markets respond to a particular president? Or what political party has had more success in the markets? … Most academic work ignores the vast differences and underlying nature of specific policies. So, the whole exercise of using statistical analysis to claim one party is better for the stock market than another is merely an exercise in . . . you guessed it . . . politics.”
It’s a presidential election year, yes, but it’s also an important election year for Congress and various state and local offices. That’s a good reminder that in the United States, we have a system of checks and balances that extends from Washington, D.C., to our individual localities. Therefore, regardless of who wins the presidential election, we have to keep in mind that what politicians promise on the campaign trail won’t necessarily come to fruition.
Currently, at the congressional level, the chambers are split between the two parties: Democrats have a majority in the House, and Republicans have a majority in the Senate. According to Jeffrey Kleintop, chief strategist for Charles Schwab, that’s actually a good thing for the economy. Back in 2008, he said stocks tend to perform better when there’s legislative gridlock and when the president’s party isn’t in control of Congress. “While the president has a lot of impact on foreign policy and trade,” Kleintop says, “the Senate sets the pace on taxes, laws affecting business and other issues of interest to investors.” 6
That’s why it’s important to take candidates’ campaign promises with a grain of salt. In addition to a majority of House seats, it’ll take a 60-seat, filibuster-proof majority in the Senate to push through any big-name pieces of legislation penned by the president. Current projections have the Senate at a 50-50 split (remember, the vice president gets to cast tiebreaker votes) and the House with a narrow single-digit Democratic majority.
However, like Kleintop mentioned, thanks to the Trade Expansion Act of 1962, the president does have influence over trade and tariffs. That’s why Wall Street is keeping one eye on President Trump’s ongoing trade conflict with China, which Moody’s says 7 is the single biggest recession risk the U.S. faces. Although the two countries signed a “phase one” trade deal earlier this year, ending the trade war will most likely take a three-phase deal that will be much more difficult to negotiate.
Still, having a different president in the White House won’t make “the China issue” go away, says Monica de Bolle, a senior fellow at the Peterson Institute for International Economics. “The China issue isn’t … going to go away if we have another Trump presidency or if we have a Democrat … These are all issues that are going to be with us for the long haul.” 8
Therefore, it’s likely the presidential race will be coupled with some economic volatility, mainly because November’s victor will get the chance to frame trade dialogue with China moving forward. Still, the U.S. economy is bigger than one person, and markets will continue to react more to economic events than to individual politicians.
There’s a reason why American business magnate Warren Buffett said, “If you mix politics and investing, you’re making a big mistake.” 9
Those words of wisdom haven’t stopped people from trying. There’s a commonly held belief that there are certain stock market cycles that correlate to presidents’ terms in office, and some have even explored 10 whether there are profits to be made from the relationship between presidential elections and stock market cycles.
However, as Buffett has pointed out, trying to split those hairs would be a mistake for your overall investment portfolio. The important thing to keep in mind is that a diversified investment portfolio is designed to weather economic ups and downs for years, if not decades — much longer than a single presidential election.
Because our country regularly flip-flops between red and blue, there’s naturally a good deal of uncertainty during election years. What happens between now and November will undoubtedly get a lot of attention, rile up a lot of people, and introduce some volatility into the market; but, if you’re planning out your investments with the future in mind, you should resist the urge to let current events influence what you do with your money.
Instead, you should take control of the things you can, like diversifying your investment portfolio, beefing up your savings, and putting your worries 11 on the back burner.
If that doesn’t give you peace of mind, then consider scheduling a time to connect with your B|O|S team. We won’t tell you whom to vote for, but perhaps we can help you feel better prepared for the November 3 election, regardless of the outcome.
1. Anne Kates Smith, “How Presidential Elections Affect the Stock Market, Kiplinger, February 2016, https://www.kiplinger.com/article/investing/T043-C008-S003-how-presidential-elections-affect-the-stock-market.html
2. Ben Carlson, “Does the Stock Market Have a Say in the Presidential Election,” A Wealth of Common Sense, August 25, 2019, https://awealthofcommonsense.com/2019/08/does-the-stock-market-have-a-say-in-the-presidential-election/
3. Sean D. Campbell and Canlin Li, “Alternative Estimates of the Presidential Premium,” Finance and Economics Discussion Series, November 19, 2004, https://www.federalreserve.gov/pubs/feds/2004/200469/200469pap.pdf
4. Vanguard, “US voters have spoken. How will the markets respond?” September 29, 2016, https://www.institutional.vanguard.ch/portal/site/institutional/uk/en/articles/research-and-commentary/topical-insights/concerns-about-us-election
5. Ron Rimkus, “Elections and Stock Prices: Assessing the Impact Is an Exercise in Futility,” CFA Institute, October 3, 2012, https://blogs.cfainstitute.org/investor/2012/10/03/the-impact-of-presidents-on-markets-a-primer/
6. Quoted in Adam Shell, “History on how presidential elections affect stock markets,” ABC News, November 4, 2008, https://abcnews.go.com/Business/history-presidential-elections-affect-stock-markets/story?id=6185252
7. Adam Galas, “How the Presidential Election Is Likely to Affect the Economy & Stock Market,” StockNews.com, January 9, 2020, https://stocknews.com/news/spy-how-the-presidential-election-is-likely-to-affect-the-economy/
8. Quoted in Galas, “How the Presidential Election Is Likely to Affect the Economy & Stock Market.”
9. Quoted in Stephen McBride, “Here’s How Stocks Perform After Every Midterm Election Since World War II,” Forbes, November 2, 2018, https://www.forbes.com/sites/stephenmcbride1/2018/11/02/ive-studied-stocks-after-every-midterm-election-since-world-war-ii-what-i-found-will-shock-you/#20c33f363c20
10. Marshall Nickles, “Presidential Elections and Stock Market Cycles,” Graziadio Business Review, 2004, https://gbr.pepperdine.edu/2010/08/presidential-elections-and-stock-market-cycles/
11. Dave Campbell, “Quid, Me Anxius Sum?” B|O|S, May 22, 2019, https://www.bosinvest.com/blog/spring-2019/quid-me-anxius-sum/