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– Evan Shear, CFP® and Dale Crossley, JD, CrossleyShear Wealth Management
As we approach the last stretch of the 2020 presidential election, we know many of our clients and other investors are wondering how their portfolios will fare after a winner is declared. Typically, every candidate tries to woo voters by claiming they will make the economy stronger and that their rival will be bad news to the markets. As an investor, such talk will likely leave you wondering how the outcome of the election will affect your portfolio. So, what do the facts from historical data say?
The Party in the White House Doesn't Dictate the Performance of the Market
When it comes to the performance of the stock market, it doesn't matter which party wins the election. Data shows that in 19 of the past 23 election years from 1928 to 2016, the S&P 500 had a positive return of approximately 11%. Yet, we had both Republican and Democratic presidents in that period. Thanks to this data, no party can claim to have a better track record on market performance. However, stocks tend to do better when Congress is evenly split between Republicans and Democrats, most likely thanks to the checks and balances that this scenario provides.
Stay Invested Regardless of Who is in Power
During election periods, you are likely to see some signs of market volatility. This might tempt you to sell your investments and focus elsewhere. However, studies show that the portfolios that do best are those that stay invested regardless of the party in power. On the other hand, portfolios whose owners invested only when their preferred party was in office underperformed overwhelmingly. As an investor, it's wise to avoid moving in and out of the market based on how the political winds blow.
Don't Expect Radical Economic Changes that will Affect Your Portfolio
Sometimes we feel that a new candidate might introduce policies that will disrupt the markets significantly. However, this isn't exactly true. Regardless of any major policy changes introduced by new governments, the Dow Jones has typically averaged returns of around 10% each year over the past century.
Also, the outcome of major legislation is often unpredictable. For example, experts thought that the Affordable Care Act would make it difficult for small businesses to hire, but surprisingly over 8.6 million jobs have been created since 2010. Also, the Tax Cut and Jobs Act was created to boost business investments, yet its impact is yet to be felt.
Monetary Policy Matters More
Although we all expect the executive branch to be the driving force of the economy, it turns out that the feds play a bigger role. The monetary policies introduced by the Fed have more impact on the financial conditions, and data shows they can help or hurt any president regardless of their political affiliations. For instance, data shows that President Obama benefitted from generous interest rates during his term while President Trump was hurt by tighter measures during his first two years.
You Shouldn't be Overly Concerned About What Happens in Washington
The fact is, markets don't care much about the politics of the day. Some of the best market returns have been achieved even when an overwhelming number of voters polled felt the administration of the day was underperforming. Therefore, we don't believe our clients or any other investor should make their investments based upon what's happening on the political scene.
Although elections can have short-term effects on the stock markets, things typically return to normal after this period. It's okay to be concerned by some of the headlines and predictions, but don't be tempted to make an emotional decision. If you want to meet your investment goals, we believe that you should try to ignore the chatter, don't let politics drive your investment decisions and most importantly, focus on your long-term financial plan.
Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results.
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Securities are offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. CrossleyShear Wealth Management is not a registered broker/dealer and is independent of Raymond James Financial Services.