Politics & Portfolios Don’t Mix
Photo by Phil Hearing on Unsplash
Do you remember, the 21st night of September... 2020? If only we remembered it as fondly as we do the classic Earth, Wind & Fire song. As we all recall, 2020 was a tumultuous, crazy, and uncertain time. Not only from the pandemic and many surfacing social movements, but it was an election year and the polls were weeks away.
Fast forward a few years and here we are again, time to choose the next leader of our country. And although we are not currently facing a worldwide pandemic, there is seemingly no less volatility and uncertainty in the world and markets than we had four years ago.
The question is: Should we let this uncertainty and/or our own political views affect the way we invest?
I'll give the answer in both English and Spanish: No.
Are Democrats or Republicans better for the stock market?
Some of us might have strong opinions about which party is better for the economy, for businesses, for the stock market.
So it's interesting to look at historical returns during red and blue presidencies (source of the first two charts below: Baird Private Wealth Management).
That looks pretty clear. The overall trend is up under either party. Democratic, Republican, it hasn't mattered.
Okay, fair enough. But what about stock market crashes? Do those happen more often or more intensely under either party?
Nope:
It seems the stock market doesn't much care who's in office, thank you very much. It's gonna go down when it's gonna go down.
Unified vs. split government
How about if the government is split, with one party as the president and the other controlling one or both parts of Congress? Many people think this state of affairs, called gridlock, is good for the economy.
Again, the markets have done quite well in any of the scenarios (source of the chart below: Capital Group).
Here's another way to look at it, with different combinations of Republican and Democrat presidents, Senate control, and House control (source of the chart below: Baird):
Unexpected results
Surprisingly, sometimes things turn out exactly the opposite of what we might think. For example:
Trump was very supportive of the energy sector, but energy was the worst-performing sector during his presidential tenure. On the other hand, he spent time fighting with big tech, but technology was the best-performing sector while he was president.
Biden fought the energy sector (canceling the Keystone Pipeline, denying new permits, etc.), yet energy has been the best-performing sector during his term in office.
This is another way to see that markets and politics mix a lot less than we think ... and even when they do mix, the result is often different than we would predict.
What if...?
Let's do a quick thought exercise. What would have happened if, 70 years ago, you put $1,000 in the market and decided to only keep it invested when a certain party held the presidency?
Incredibly:
That $1,000 would be worth $27,400 today if only invested when a Republican was president.
That $1,000 would be worth $61,800 today if only invested when a Democrat was president.
That $1,000 would be worth $1,690,000 today if left in the market the whole time.
(Source of the chart below: Bespoke via Josh Brown.)
The bottom line
So, what say you? Are you letting politics affect or direct how you invest? I'm hopeful that reading this might convince you to stay the course in the stock markets, no matter who leads the government.
Remember, when it comes to predictions about the stock market, politics and portfolios don't mix.