A recurring question I am being asked is about the coming election and what the outcome will mean for the economy and markets. It’s a good question and one that’s shared across the investing community. A recent survey by RBC Bank on June 24th cited over 100 institutional investors found that they were more worried about the election (73%) than they were about a second round of coronavirus (68%).
It seems easy to draw a straight line on policies and outcomes. Just watch any news outlet and you will hear plenty of commentary and dire predictions about what will happen if Joe Biden is elected or if Donald Trump is re-elected. The arguments are usually compelling and backed by supporting data. The only problem is history would suggest it doesn’t matter and that the economy and the markets will be fine either way.
From 1926 to present we have had a Democrat as president for 48 of those years and a Republican for 46 of them. The Standard and Poors 500 index has produced a 14.94% return during a Democrat’s reign vs a 9.12% return during a Republican President.
When you add both houses of Congress into the mix the data again suggests it doesn’t matter. Under a unified Democrat regime wherein the Democrats control the presidency and both houses; the S&P 500 averaged 14.52%. A unified Republican control generated the exact same return. The best return (15.94%) came from a divided Congress with a Democrat as President. The return for a Republican as President with a divided Congress was the worst of the results coming in at 6.99%.
“But this time its different.” Google search for market predictions if Trump were to win the 2016 election. My first result came from Politico 10/21/2016 which stated “New research out on Friday suggests that financial markets prefer a Hillary Clinton presidency and could react with panicked selling should Trump defy the polls and deliver a shocking upset on Nov. 8.”
The problem with making predictions about the market and politics is that there are so many factors in play. Yes, the President of the United States has an impact on markets as well as does Congress. But so do the Prime Ministers and Presidents of other countries. So do the corporations, populations, global pandemics, technological advances, energy prices and maybe even the Kardashians. We often want to draw a simple bright line between two concepts and disregard all other data. Michael Shermer a science historian stated, “Humans are pattern-seeking story-telling animals, and we are quite adept at telling stories about patterns, whether they exist or not.”
Bottom line: beware of letting politics drive your retirement portfolio. Talking heads are paid a lot of money to have an opinion and events like elections provide an opportunity to speculate and make bold predictions. Don’t be tempted by the allure of market timing and the idea that you can both successfully pull out of the market before it drops and then again successfully reinvest before it regains its momentum. As Ben Graham, mentor to Warren Buffet, said: “Market timing is a practical and emotional impossibility.”
If you want to be a successful long-term investor – you need to be able to bear uncertainty and maintain a well thought out Investment Policy that provides a buffer during market volatility and allows you to maintain your discipline throughout market cycles.
Gardner Sherrill, CFP, MBA, is a certified financial planner with Sherrill Wealth Management. To learn more, visit sherrillwealth.com, a Bradenton wealth management firm specialized on living in retirement.
The opinions expressed in this material are not intended to provide specific advice or recommendations for any individual.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and my not be invested into directly.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all industries.
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.