It has been really tranquil over the past several years and never more so than the past few months. So it may come as a shock that the first Tuesday in November is fast approaching (in case you’re curious, the first Thursday of November is actually the day everyone can universally agree we should be most concerned about: National Men Make Dinner Day).
It seems as though every election brings dire warnings about what this candidate will do to your stock market portfolio if elected. These “experts” are wrong. Trying to time the market is a loser’s game as Jack Bogle would say.
On a recent Animal Spirits Podcast, the hosts discussed all the consternation surrounding the election and what that means for peoples’ investment portfolios. They correctly concluded that elections affect absolutely nothing in large part because the market has already priced in the most likely scenarios.
It’s the existential events catching us by surprise (Covid, the Great Financial Crisis, 9/11 etc.) that cause massive moves in the market over the short-to-medium term. Even Trump’s unlikely win in 2016 was met with an initial limit down move overnight, but then recovered rapidly. Investors processed the surprise and collectively realized the capitalist engine that drives our economy would keep rolling along.
I can slice and the dice the data a number of different ways, but nothing explains this issue better than the following chart:*
A few thoughts on this chart: The adage that Democrats in the White House are worse for the markets is simply not true. Also, the biggest negative outlier was President Bush the Younger (As opposed to President Bush the Elder. I’m starting that, join me) who got hit with a few nasty geopolitical, economic events outside of his control. Bush the Younger entered office in the midst of a drawdown from the tech bubble bursting and then had the market swoon further after 9-11. In his second term, he was the one left holding the bag for years of Wall Street misconduct coupled with decades of bad policy with respect to home lending and borrowing.
Remember when pundits argued that if President Obama were elected, the market was going to crash? Or what about the predictions that because President Trump was so erratic and unconventional, it would destabilize the market? None of those things happened. Yet, people bought and sold equities based on those elections and missed out on long-term compounding in the market. Now is probably a good time to mention:
“The first rule of compounding: Never interrupt it unnecessarily.” – Charlie Munger
Despite every President’s claims that he spurred a rally in the market, I believe the reasons are less narcissistic and more uplifting. Every day, more Americans wake up trying to improve their communities and businesses than seeking to disrupt them. Never bet against America (no matter how immature her citizenry or leaders behave in the short term). Because our capitalist system generally rewards ingenuity and risk, you enjoy America’s tremendous compounding effect by staying invested in broad-based index funds over time.
There is an area where Presidential elections do play a role in what your retirement and legacies look like. That area is called taxes.
The 2016 Tax Cuts and Jobs Act dropped several individual tax rates but capped the State and Local Tax (SALT) rates. The Affordable Care Act Tax is another recent example. Taxation is a policy that is built, modified, torn down and rebuilt by our politicians. It has a direct effect on your financial planning considerations for your life and legacy.
To believe that someone’s political views, which may or may not align with your own, will somehow impact your investments in the market is clearly wrong according to the data… so long as that candidate champions free markets and American business ingenuity. It is egotism in the extreme to believe that one’s political beliefs are so correct that they must accurately forecast the direction of the markets.
* The chart I took from Investopedia (using Y Charts) runs up to Coronavirus. It seems anomalous to include the virus-induced market sell-off, followed by the dramatic rally (concentrated almost entirely in a group of tech stocks) above those highs followed by the most recent correction. Given exogenous events, the most accurate data for Trump’s administration would be once his term ends.