How Will the Election Year Affect Your Portfolio?

How Will the Election Year Affect Your Portfolio?

October 28, 2020
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About this time every four years, many investors begin to wonder, “Which candidate will be better for the markets?” It’s a natural question, especially when almost every candidate touts his or her platform as the one voters should choose if they want to enjoy prosperity. But research does not bear out any meaningful correlation between a particular political party and good or bad stock markets. 

A recent article in Forbes indicates that Democrat presidents may actually have a slight edge, but it is far from clear that there is any cause-and-effect relationship between the party affiliation of the occupant of the White House and the performance of the markets. Indeed, given the immense complexity of the financial markets and the myriad of factors contributing to price performance, no single individual—even a US president—can make a verifiable claim to the ability to move markets one way or the other. 

Another important factor in this equation, of course, is which party is in control of Congress. Any policies that the president attempts to enact will typically have to gain passage through the House and Senate, and the party that controls one or both houses can exert tremendous influence, either by supporting or denying passage of the executive branch’s desired legislative program. 

Surprisingly, history indicates that the stock market tends to exhibit better returns when there is a divided Congress than when either party controls both houses. According to a recent article from LPL Financial, in the years 1950–2019, when the GOP has controlled both houses of Congress, the S&P 500 has averaged a 13% rate of return with an average growth in gross domestic product (GDP) of 3%. With Congress under Democrat control, the S&P 500 has averaged a growth rate of 10.7%, with an average increase of 3.3% in the GDP. But when control of Congress has been divided between the two parties, the S&P 500 has averaged a gain of 17.2%, with a GDP growth averaging 2.8% 

 

This may be because the markets prefer strong checks and balances, which tend to insure that neither side can overly influence policies such as taxation, trade, and others that directly impact businesses. 

Of course, it can be difficult for us to separate our personal political views from our investment decisions. However, this is an important lesson on the benefits of a long-term investment approach. As history demonstrates, attempting to “time the market” on the basis of perceptions of a presidential candidate’s or Congress’s likely influence on the markets would have resulted in missing out on much of the growth in the value of equities during the last decades. 

We offer our clients solid, research-based investment advice, during election years and all the rest of the time, as well. If you have questions or concerns about your investment portfolio, your financial plan, or other important matters, please talk to us

 

 

SOURCES 

1. Klebnikov and Touryalai, “We Looked At How The Stock Market Performed Under Every U.S. President Since Truman — And The Results Will Surprise You,” Forbes (online), July 23, 2020, https://www.forbes.com/sites/sergeiklebnikov/2020/07/23/historical-stock-market-returns-under-every-us-president/#7c7d6c64faaf

2. LPL Financial, “How Could Election 2020 Connect to Stock Performance?” https://www.lpl.com/newsroom/read/election-year-and-stock-performance.html.