Balancing Expectations: Do political outcomes really affect your money?

by David Novak

 

Every presidential election elicits far-reaching effects on the social, political and economical facets of American life, both for the nation as a whole and our individual existence. With the financial climate as volatile as it is, citizens throughout the nation wait with bated breath to see how November 8th will, to put it plainly, affect their bottom line. How will the election of Donald Trump or Hillary Clinton affect the stock market, the bond market or interest rates? How will portfolio considerations alter after the race is decided?

Decades as a Certified Financial PlannerTM has taught me that the subject of politics can be quite an emotional one anytime a major election is upon us, but this one will definitely go down in the history books as eliciting some of the most impassioned concern I’ve seen from those interested in protecting their pocketbooks. A couple clients have even suggested liquidating their entire long-term investment portfolio if a specific outcome were to occur. Especially since I consider these clients to be relatively calm and rational folks, it was somewhat surprising to see how the election hysteria could induce them to introduce such a rash, knee-jerk idea.

While I have no better insight than anyone else as to who will ultimately be elected Commander-in-Chief, one thing I do know is that emotion and investing do not mix. Instead, I encourage clients to investigate the actual historical data. Do markets perform better under a Republican or Democratic president? According to a recent Vanguard study on the topic, there’s really very little difference. Going all the way back to 1852, the study found that the Dow Jones Industrial Average returned an average annual return of 8.97% under Democratic presidents, and an average of 8.66% under Republican presidents. As Blackrock Chief Investment Strategist Russ Koesterich has commented, “Historically, whether a Republican or Democrat occupies the White House has had no statistically significant impact on US equity markets.”

Digging deeper than simply looking at the party of the president, how about when Congress is taken into account? Considering the period 1901-2016, a study by Ned Davis Research found the following average annual returns for the S&P 500 stock index:

Democratic president/Republican Congress 8.6%
Republican president/Democratic Congress 2.4%
White House/Congress controlled by same party 7.1%
Democratic president/split Congress 10.4%
Republican president/split Congress -4.3%

For the most part, what this data indicates to me is the positive effect of checks and balances. In my experience, markets always prefer some sort of balance, even gridlock, rather than extremes. Currently the political betting markets suggest this outcome, with the Democrats favored to take the White House and Senate, and the Republicans likely to retain the House.

Presidents always get too much credit and too much blame, when in reality it all gets back to the old political phrase, “it’s the economy, stupid.” Just remember what the long-term drivers of stock prices are – corporate profitability, worker productivity and global competitiveness. Apropos of the election season, as famed investor Benjamin Graham has said, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine,” a metaphor suggesting that in the short term prices are driven by sentiment while in the long term trends are driven by something you can actually measure more concretely – financial results.

David Novak, CFP® is a Certified Financial PlannerTM at Novak & Powell Financial Services in Pinellas County. Please note: he is not an attorney and this article should not be construed as one offering legal advice. For information about investment decisions and financial planning, email him at david@novakpowell.com.

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