As we get closer to the US Presidential election, the chatter begins to build about who may or may not occupy the White House, which in turn leads investors to worry about how this might impact the stock market. I’d like to provide some information and historical perspective.
For years now, politics and investing have been spoken about in the same breath. Market pundits and even presidents themselves have linked the performance of the stock market as a sort of “barometer” of their administration’s policies. What's interesting, the data doesn’t support this connection.
Over the past 100+ years, the long-term performance of the market has shown almost no correlation with government policies.
Informed investors realize that the key drivers of stock market performance have been, and will continue to be, earnings and economic growth.
Much of our collective memory about the performance of the economy under various past presidents’ stems from incorrect historical narratives, not hard data.
Presidential Stock Market Returns vs. Economic Growth (1957 - present)
While we want to believe that this election season will be different than so many previous elections, it won't be. There will be vitriol on both sides. It will be a knock-down drag out fight, and it will not be pretty. But…the good news is, in spite of this, history has shown that investors have prospered even during the most difficult political times. In fact they done extremely well during all sorts of challenging times. There has never been a time when there was not something to be concerned about, whether it be, up-coming elections, trade-wars, inflation, social unrest, military wars, or anything else that grabs the medias' attention.
Several years ago, Invesco, a provider of financial products, coined a phrase that bears repeating: “Hating the government is not an investment strategy.” We agree.
While nobody can say with absolute certainty who will win in November 2020, we can say for most people staying the course has made the most sense for long-term investment success.
Here are some certainties during this uncertain election season.
6 Ideas to Keep in Mind No Matter Who Wins:
Many people attempt to use historical narratives to inform ourselves about the future, but do we get the history right?
The charts below show a metric for each president, in dark blue, compared with the long-term average growth rate for that metric since the end of World War II. Clearly, history is often remembered differently than the actual data. And you thought calculus was hard.
How about only investing when your particular party controls the Presidency?
“Partisan” portfolios – which would invest only when a Democrat or a Republican was in office – significantly underperformed the “bipartisan” portfolio that stayed invested regardless of who was in power.
The difference is a result of the fact that the US stock market rose fairly consistently over the past 120 years, even while enduring two world wars, many smaller wars, two major financial crises, several recessions, and now, not one, but two pandemics. The best-performing portfolio over the past 120 years was one that stayed fully invested through both Democratic and Republican administrations.
The more time in market, and not trying to time the market, the better investors have done. See below.
So what does all this mean?
It means if you have a well-designed investment portfolio, you can stop worrying about who's going to win the Presidential election and focus on what you can control and what I would argue is most important. Things like, the relationship with your family & friends, your health, the people you can positively impact, and your long-term goals.
Charts and data from Invesco.
Paul R. Rossi, CFA