While it is common perception that the political party in the White House drives markets and the economy, history shows us that neither party can consistently be credited with superior economic or financial market performance.
Over the past 75 years, the S&P 500 Index delivered an average annual return of approximately 11 percent, through both Democratic and Republican administrations. The stock market’s return was only negative for a presidential administration when the country was in a financial crisis (2008) or experiencing a stagflationary spiral (1973).
Similarly, we often worry that a progressive candidate will radically re-engineer the economy. Despite concerns about major government policy changes and which party gets into the White House, business investment and government spending have been remarkably consistent as a percent of GDP throughout U.S. history.
History suggests that election results should not be the primary driver of investment decisions. Long term, the fundamentals of earnings and interest rates, labor growth and productivity, and the mean-reverting nature of an independent monetary policy ultimately drive financial market returns. This is particularly true now, when Covid-19 and the related fiscal and monetary response are arguably much more influential.
On the fiscal policy front, bipartisan support for a fresh round of fiscal stimulus remains stuck in political gridlock. On the monetary policy front, the Federal Reserve is committed to easing measures and plans to keep interest rates near-zero for an extended period of time. As a result, we would expect the current environment to remain relatively supportive for stocks and the yield curve to keep steepening only modestly.
Clearly, policy changes will have ramifications for financial plans, tax strategy, asset allocation and estate planning. While future policies and their implications are unknown, these evolving policies are key inputs in our approach to long-term wealth management.
We will be keeping a keen eye on the upcoming key dates and policy updates as they develop, but we continue to remind ourselves that political checks and balances mitigate the impact of any radical transformational proposals. The impact of extreme changes tends to evolve over time.
As if health concerns around a global pandemic, unclear economic growth outlooks, timing and amount of fiscal stimulus for households and businesses and political concerns were not enough, corporations will begin to release third quarter earnings in the coming weeks as well.
We anticipate volatility to continue and are prepared to navigate it on your behalf. We continue to encourage you to keep your investment horizon in focus and to try not to allow short-term swings or quick emotions influence your mindset.
Please do not hesitate to reach out to our team. We are here for you and want to be a resource to discuss the impact of potential policy changes on your portfolio and the markets. We want to make sure that you have a financial plan that you are comfortable with in any environment, which we believe is achieved through a well-constructed, diversified investment portfolio anchored to individualized long-term goals, risk tolerance and time horizons.