Don't Let Election Distract You From Investing Fundamentals
Everybody is trying to get an edge on the market and predict what it will do leading up to and after the election in November. Like many advisers, I’m getting questions from clients like this: “What does the upcoming election mean for my portfolio? What happens if the Democrats win? Are my taxes going up? Will the Democrats kill the economy?” The bottom line is that, if you are a long-term investor looking for long-term results, it doesn’t matter.
Investing is a lot like baseball in that there is a statistic for everything. The investing media is pulling out statistics relating to the “presidential cycle.” At a high level, the first two years of a presidential term is associated with below-average returns, while the last two have produced well above average returns.
From a psychological and political perspective, this makes sense. In the first part of a term, there is uncertainty about which initiatives the president will propose and which might be implemented. The last two years are focused on getting reelected, and there is an increased effort to stimulate the economy. There are even statistics about how the market does when the country has a divided government and which party holds the White House, the Senate and the House.
While elections don’t always predict market moves, the economy does influence who is elected. According to a May 2020 JP Morgan Market Bulletin, “An incumbent president has won reelection 65% of the time since the Civil War. However, in all instances in which the incumbent lost, there was a recession or depression during their term.” This is one reason politicians work to stimulate the economy heavily in the last two years of a presidential cycle.
While politicians attempt to influence economic growth, the stock market is not the economy. In the long run, investment returns are driven by basic economic fundamentals: corporate earnings, economic growth, interest rates and many factors outside the control of any particular administration. In recent history, we have had natural disasters, pandemics, terrorism and geopolitical tension affect markets. The economy, and therefore the market, is simply bigger than the direction the political winds are blowing.
So how can you manage your investments and stick to your investing discipline in an election year? The first thing is to ignore the headlines. The media is all about capturing eyeballs, and fear sells. Emotions and fear are influenced not just by traditional media but increasingly also social media.
Investors need to pay attention to fundamentals. The COVID pandemic has wreaked havoc on the economy and added another layer of uncertainty on top of the underlying election. It has fueled concerns about how the economy will recover and how to get people back to work. The next administration will influence the recovery and which industries will survive, as well as those that might not.
One of the most important things an investor can do is keep a long-term perspective. Elections are noise for the markets and create uncertainty. While the markets hate uncertainty and it leads to increased volatility, the volatility can also provide opportunity. Finally, it doesn’t matter which party wins. Our system of government is designed to provide checks and balances on power and works to make gradual change (or, in recent years, create gridlock).
Dimensional Fund Advisors asserts, “We would caution investors against making short-term changes to a long-term plan to try to profit or avoid losses from changes in the political winds. While surprises can and do happen in elections, the surprises don’t always lead to clear-cut outcomes for investors.”
Don’t let your political emotions overrule your investing discipline. It’s not exciting, but maintaining a balanced, disciplined portfolio tailored to your specific situation will pay off in the long run.