All elections are important, but to many investors, the coming election feels particularly weighty. The policy ramifications of White House and congressional outcomes can seem unnerving, especially given the wide policy differences and, in some cases, dramatic policy proposals (particularly, taxes).
However, history suggests election results should not be the primary driver of investment decisions. This is particularly true now, where COVID and the related fiscal and monetary response are arguably much more important than potential.
On a short-term basis, politics have the power to move markets and create stock market volatility; however, the relationship between politics and financial markets is not so clear cut. While there may be conventional wisdom in how each party’s policies will affect the economy, politics play only a small role in the direction of the economy and markets. Political checks and balances mitigate the impact of radical, transformational proposals. Plus, the impact of changes tends to evolve over time (often into the next administration).
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.
Growth of a Dollar Invested in the S&P 500: January 1926–June 2020
Markets have rewarded long-term investors under either political party. Neither party can consistently be credited with superior economic or financial market performance.
The S&P 500 Index delivered an average annual return of approximately 11 percent over the past 75 years, through both Democratic and Republican administrations. The U.S. economy also expanded around 3.0 percent during that period. The stock market’s return was negative for a presidential administration only when the country was in a financial crisis (2008) or experiencing a stagflationary spiral (1973).
It is important to remember that monetary policy often has a more direct impact on the markets, than who is elected into the executive office. Markets have done well during prior periods of easing financial conditions. Currently, the Fed is providing policy support and is likely to keep rates lower for longer. 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 can have ramifications for financial plans, tax strategy, asset location and estate planning. Those evolving policies are key inputs in our holistic approach to long-term wealth management. However, we do not advocate using predicted or actual election results as a significant factor in short- or intermediate-term asset allocation decisions.