Every quadrennial, about this time of year, one of the most frequently asked questions (in many different yet similar iterations) from clients is: “What do you think will happen to my portfolio if “x candidate” wins the U.S. Presidential election?”
Of course, the future is perfectly unknowable to anyone. However, there have been 59 Presidential elections in our country’s history. Luckily, we do have relevant electoral and economic data to help guide us in answering this question.
Political consultants, pundits, and financial journalists all do an excellent job of helping us all manifest our greatest anxieties about the election and what it will mean for our investments and savings. In today’s hyper-partisan political environment, for a candidate to secure their party’s nomination, they must appeal to a majority of their political party’s base. Then, in the general election, we see the candidates both tweak their public positions on issues and gravitate more towards the middle or, said a different way, to appeal to the independent voters.
No matter what policy position a candidate takes, they also must make sure their party controls both chambers of the legislative branch to have a chance at having their legislative priorities become reality. And, if the winning candidate’s party does not have a majority in each chamber, they must work with the other party to pass their legislation.
What happens if your candidate loses the Presidential election and the other party also has majorities in the upper and lower chambers of Congress? One of the geniuses of our system of government is we have mid-term elections every two years. It is safe to assume the elected party will want to carry out the will of the electorate and retain majorities in Congress. If they pass legislation the electorate believes is bad for the economy, the President risks losing the ability to accomplish their legislative priorities and becoming a “lame duck” for the remainder of their term in office.
Arguably the greatest investor of our time, Warrant Buffett, quipped at the June 2022 Berkshire Hathaway shareholder meeting: “What we learn from history is that people don’t learn from history.” We do not want to be lumped into the group of people Mr. Buffett was lamenting, so let’s look at some historical data surrounding U.S. Presidential elections.
The chart above is borrowed from The Motley Fool which compiled this data from YCharts and The White House Historical Association1. As you can see, the S&P 500 has performed well during Democratic and Republican Administrations. Each party has also experienced times when the S&P had negative returns during their control of the Executive Branch.
Assume you believe the other party’s policies are so terrible for your investments that you decide to “cash out” of the market and wait until your party reclaims control of The White House. Following your candidate’s inauguration, you will return to the market and remain invested until the other party regains control. Rinse and repeat. How would you fare if you started this practice in the early 1960s and continued to the present? See the chart below from Charles Schwab and Morningstar for perspective.2.
This second chart illustrates that remaining invested no matter which party controls the Executive Branch is the prudent investment strategy. Entering and exiting the market based on who wins the Presidency would be catastrophic for investors. But why?
Market performance is based on many macro and microeconomic factors. The winner of the U.S. Presidential Election is just one of many, many variables that influence market performance. The data is very clear that altering your wealth management plan based solely on who wins the Presidency is not a wise idea.
What does the winner of the Presidential election have to do with us as investors? I argue it has very little to do with us and our plans! As investors, we are partial owners of the greatest, most innovative, enduring, and profitable businesses in the world. A business’s number one goal is to maximize shareholder wealth. Our great technology companies will continue to meet consumer demand, and make their products more durable, efficient, and faster than ever before. Drug companies will continue breakthrough research on medication, vaccines, and medical devices regardless of who wins the 2024 Presidential Election and future elections.
Throughout our economic history, we have seen that no matter what foreign or domestic policies are in vogue, no matter what foreign conflicts are flaring, the tremendous companies we own in our portfolios always have increased their earnings and dividends they have distributed to us.
Therefore, we must not work against our wealth management plans to interrupt their progress. When we experience short-term declines in the equity market, we will rebalance your portfolio and/or realize capital losses to systematically and unemotionally optimize your portfolio, reduce taxes, and execute your plan. We have never made decisions for you or your family based exclusively on who we think will prevail at the ballot box in November. And we never will because history tells us not to.
We understand the anxieties surrounding elections, especially this one. As always, we are here to discuss your plan with you at any time.
1. https://www.fool.com/investing/2024/07/05/average-stock-market-return-democrat-republican-pr/
2. www.schwab.com/learn/story/what-to-watch-as-2024-election-approaches