As the 2024 presidential election draws near, the race between Joe Biden and Donald Trump intensifies, bringing with it a wave of investor apprehension. The political landscape is fraught with tension, and headlines about policy debates and election forecasts are ubiquitous. In such an environment, investors may find it challenging to separate emotions from financial decisions. Understanding how past elections have influenced market dynamics can help investors stay focused on long-term goals and avoid reactionary moves based on political developments.
Should Politics Influence Your Portfolio?
Political viewpoints carry strong emotional sentiment and can influence various factors in your life. But should you let presidential politics influence your long-term investment decisions? A 2009 study titled “Political Climate, Optimism, and Investment Decisions” examined this very question. The authors found that people’s optimism toward financial markets and the economy is influenced by their political affiliation.
Key Takeaways:
- When an investor’s own party is in power, individuals become more optimistic and perceive the markets to be less risky. As a result, they are more likely to invest confidently and maintain or increase their market exposure.
- When the opposite party is in power, their perceived uncertainty levels increase, leading to stronger behavioral biases and poorer investment decisions. This often results in reduced market exposure, increased cash holdings, or shifting to perceived safer assets.
- Investors should recognize these biases and focus on long-term fundamentals rather than short-term political changes.
The Stock Market's Resilience Across Parties
The stock market has performed well under both parties, showing resilience irrespective of the president's party. From 2008 through 2020 across the Obama and Trump administrations, the S&P 500 generated a total return of 236%. This period included budget battles, fiscal cliffs, debt ceiling crises, U.S. credit rating downgrades, the global financial crisis, the pandemic, and more.
What Actually Matters to Markets?
While good policy is significant, other factors often have a more substantial impact on your portfolio than which political party is in the White House. These include:
- Interest rates: They directly affect borrowing costs and investment returns.
- Economic outlooks: Overall economic health influences market performance.
- Inflation: Rising prices can erode purchasing power and affect profitability.
- Changes in policies: Policies on taxes, trade, industrial activity, and antitrust impact specific industries.
- Wars and geopolitical events: These can create uncertainty and volatility.
Business profitability is a strong gauge that should not be ignored. Increased demand for goods and services boosts company profits and ultimately, stock prices. Additionally, proposed legislation must pass through the House, the Senate, and be signed by the President to become law, a process that can take up to a year. A lot happens in the stock market in a year independent of pending legislation.
Historical Episodes: The 1990s and Early 2000s
The 1990s and early 2000s provide a clear example. Bill Clinton's terms coincided with the information technology boom, while the ensuing dot-com bust began with George W. Bush's presidency. The 2008 financial crisis occurred at the tail end of Bush's second term, encompassing both market crashes. Despite this, it's a stretch to argue that their presidencies were the primary reasons for these booms and busts. While policies influenced these events, they were more about technological and financial innovations. These episodes suggest that presidents often receive too much blame and credit for economic conditions.
Positive Stock Market Returns Across Parties
For those still unconvinced that political headlines should be avoided in investment decisions, historical data shows that average stock market returns have been positive under both parties. The S&P 500 has averaged double-digit gains whether Democrats or Republicans are in the White House. History also tells us that market returns are positive on average during election and non-election years alike. While the past doesn't guarantee the future, and individual year returns are unpredictable, exiting the market due to an election outcome or simply because an election is occurring is not a decision supported by history.
Conclusion
Decisions made during election cycles can be driven by emotion rather than facts. Election cycles, especially recent ones, are fraught with misperceptions, personal biases, and bad information. While the president is certainly a contributing factor to the overall trajectory of the U.S. stock market, they are only one factor, and there are many other factors that may provide an even stronger influence.
The best course of action for long-term investors is to stay balanced and not make investment decisions based on political preferences. While it's natural to be concerned about political impacts, maintaining a focus on fundamental economic and market trends will likely yield better long-term investment outcomes. Presidents and their policies come and go, but the resilience of the market and the business cycle's influence endure.
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