The Impact of Politics on Financial Markets

As we head into the 2020 presidential race, one of the top concerns for many of our clients is the potential impact of the election on financial markets. Regardless of the news channel, there is intense debate on whether the financial markets will prosper or perish as a direct result of who wins the White House. Democrats and Republicans are often biased by data published to favor one political candidate over the other to prove superior economic leadership. Such political bias can then influence individuals to make rash investment decisions that could prove costly. Some of the questions we often hear are:

• Should we sell out of the market if X candidate wins?
• Should we shift our portfolio allocation as the election nears?

When searching for data online, hundreds of articles and outlets can provide data that can lead you to any conclusion you prefer. Reuters published an article last year stating that in presidential election years (from 1925-2017), the market was up by an average of 17.9% the year when Republicans were elected versus -2.7% when a Democrat was elected. However, in the first year of a president’s term, the market only averaged 2.6% when a new Republican was elected versus an astounding 22.1% when a new Democrat was elected.  

In a study released by CXO Advisory, the S&P 500 averaged 6.6% per year under Republican presidents versus 12.0% under Democratic presidents (for the period between 1950-2017). However, when a Republican president enjoys a Republican-controlled Senate, average annualized returns were 13.4% vs. 9.8% with a Democratic president and Democratic-controlled Senate. With a wide range of data, it is easy to see how individuals can form different opinions and outlooks regarding the potential market impact of a presidential election.  

Let’s use a hypothetical example to illustrate further the importance of expressing one’s political views through voting, rather than trading.

Imagine two individual investors, each starting with $100,000 the day before Ronald Reagan took office in 1981. Individual investor A only invested during Republican presidencies, and individual investor B only invested during Democratic presidencies. Further, let’s assume that each investor kept their assets invested through January 31, 2020, and earned the exact return of the S&P 500 when invested and earned 0% when not invested. The S&P 500 obtained the following returns during each of the following Presidents’ tenures:

Egan, Matt, et al. “From Reagan to Trump: Here's How Stocks Performed under Each President.” CNN, Cable News Network, 31 Jan. 2020, www.cnn.com/interactive/2019/business/stock-market-by-president/index.html.

Individual investor A would have earned a cumulative total return of about 180% over 23 years, resulting in a total asset base of approximately $280,000. Individual investor B would have been invested for 16 years, earning about 774% and increasing their initial $100,000 to $874,000. However, if both investors would have stayed fully invested from January 1, 1981, through January 31, 2020, both would have gained about 2,350%, leading to an account total of approximately $2,450,000, reflecting the advantage of compound interest over a long-time horizon.

While these statistics are interesting, it is nearly impossible to separate the returns that should be attributed to economic growth, an Administration’s policies, or just good or bad timing. For example, how much of the 118% return during Reagan’s administration or the 182% return during Obama’s administration should be attributed to impact that each President made versus timing or other externalities? Both entered office around a time when equities had just gone through a period of lackluster returns for some time (Reagan) or severely battered due to a deep recession (Obama).

The point we want to make clear is that it is crucial to maintain a long-term investment perspective. Over the last fifty years, which has included six Republican presidents, three Democratic presidents, five changes in the Senate majority, and four changes in House majority, the S&P 500 has averaged 10.6% per year and has been positive forty out of the last fifty years (MFS Institutional Advisors, Inc. “By the Numbers.” 6 Jan. 2020).

During the same period, our country has experienced multiple wars, natural disasters, recessions, and significant social and technological change. These events may have caused short-term losses or gains, but over time, one can easily see that market trends have been consistently positive through the years. No matter what happens in this presidential race, or any other future election, it is important to refrain from making impulsive decisions with a short-term outlook. The optimal strategy remains staying the course with one’s long-term investment strategy and trusting that it can weather the financial, political, and social storms over the years and decades to come.

By Kevin Ostergaard, CFP®, ChFC®, Associate Financial Advisor