Politics, Elections, and Your Portfolio

KEY TAKEAWAYS:

1. The stock market has shown no historical preference for a political party but performs appreciably better when the Executive and Legislative branches are in opposition.

2. Rather than a political party, investors should focus more on tangible economic data (e.g., corporate profits, valuations, interest rates, inflation, and monetary policy) to drive their investment decisions.

3. While new administrations can impact the rotation of sectors in and out of favor, a thoughtfully crafted, long-term financial plan may be best served by keeping politics out of investment decisions.

How the 2020 race may impact financial markets

Not surprisingly, many Americans are intensely passionate when it comes to their political beliefs. For some, it’s a fervor that’s rivaled only by their love for a favorite sports team—a passion that all too often leads them to drastically overestimate (either positively or negatively) the economic impact of whichever party happens to be in power.

The result, unfortunately, is that sometimes investors tend to allow their emotions to alter their long-term financial plans. They may react to what they perceive will be the short-term impact of an administration change by either moving into safe-haven investments if their candidate loses or becoming overly aggressive if their candidate wins.

However, truth be told, when it comes to the historical performance of markets, the political party in charge makes little to no economic difference.

PARTY AFFILIATION DOESN’T DICTATE MARKET PERFORMANCE

When historical market data is analyzed, regardless of which party is in power, there’s no statistical distinction in market performance whatsoever. Since 1945, a traditional 60/40 stock to bond portfolio has delivered a 6.0% average annual return under Democrat presidents, and a 6.1% average annual return during Republican administrations.1

What is perhaps more interesting to note, however, is that financial markets tend to respond more positively to shared power—when the Executive branch has strong Legislative checks and balances. Looking at annualized returns for the two calendar years following every presidential election since 1952, the highest stock market returns have occurred with a Democrat in the White House and either a Republican (15.8%) or split Congress (14.0%).2

Instead of political party affiliation, investors would be well-advised to focus more on tangible and measurable economic factors, where personal bias and emotions do not play a role:

  • Where are we currently in the business cycle?
  • Will the Federal Reserve continue its present monetary policy course, and how might that impact interest rates and inflation going forward?
  • What is the likelihood that corporate profits and valuations will be able to continue rising from their current levels?

BUT PARTY PLATFORM CAN IMPACT SECTOR ROTATION

One area where politics and economics do intersect to some degree is in how a particular administration’s platform and policies can impact the relative performance of various sectors. In previous election cycles, Republican wins have provided a tailwind for Defense, Energy, and Financial stocks, while Democratic administrations have signaled growth in Healthcare, Consumer Staples, Utilities, and Real Estate. To a great degree, these trends appear to be holding true to form in 2020 based on the party platforms recently laid out.

Given the ongoing pandemic, the Healthcare sector may see a significant surge if Joe Biden is elected. The Democrats also seem highly focused on renewed infrastructure spending, which could be a boon for transportation, building, alternative energy, and broadband providers. And (unique to this election cycle) large multinational corporations could respond well to a Democrat administration, in hopes of a global loosening of trade sanctions.

Conversely, a Trump re-election will likely continue to buoy the Defense and Aerospace sector due to sustained higher levels of government spending. It would also bode well for the Materials, Financials, and Energy sectors, which could expect current deregulation and tax cut levels to be maintained.

SOMETIMES DOING NOTHING IS THE BEST COURSE OF ACTION

Between now and November 3, 2020, countless political and economic pundits will raise their voices about how one candidate or the other will save or ruin the economy and the stock market. But the actual impact of who wins and who loses is almost always overstated. The economy is driven by the actions of millions of people and thousands of institutions—not just one person or party.

Aside from perhaps dialing up or dialing back a bit on exposure to certain sectors, as well as periodically rebalancing investments to maintain an appropriate asset allocation, the best thing investors can probably do for their portfolio is to leave partisan politics out of the equation.

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