Every four years the citizens of the United States exercise their constitutional right to vote. It is also around this time of year that opinions, predictions and prognosticators reappear after a four-year hiatus to opine about the impact of elections and market returns. Creating more investor angst and confusion and leaving many questions unanswered around the perceived influence of elections and a potential change of government control.
What gets overshadowed as the election cycle looms closer are the areas that have longer term market influence; the business cycle, which is longer than just one election, valuations, monetary policy, actions taken by our federal reserve, and the current geopolitical climate. The current pandemic and widespread disasters both domestically and abroad play a role as well. This is not to completely dismiss who is in the White House because fiscal policy and international relations can change. It is to recognize there are many factors which come into play. Reminding us that just letting politics drive investment portfolio decisions can be misguided and potentially damaging.
How Politics Play a Part
In polite conversation, religion, money and politics should generally be avoided, as they say. The reality is many people have strong opinions regarding a particular political party and their respective economic objectives. A study that looked back to 1900’s found that the Dow was up 9% versus 6% regardless of when a perceived business focused administration was occupying the White House, according to Kiplinger.
Market fluctuations on the other hand can be between 15%-18% with little regard to political affiliation. Both the technology and consumer discretionary segments, top performing, and energy and financials, bottom performing, have remained relatively unchanged under the last two presidents. Small cap stocks have underperformed large cap as well, according to BB&T Perspectives. A basic tenet of investing is that the markets do not like uncertainty. The coming election will in all likelihood create volatility and speculation. Newsworthy, yes, however from a longer investing standpoint not as impactful. The below chart illustrates how markets performed given the administration in power:
Focus on Your Long-term Goals
Understanding the impact and influence political cycles have on the markets is interesting. Using it to solely make investment decisions may do more harm than an appropriately allocated portfolio aligned to your long-term goals and objectives. Make sure you exercise your right to vote and realize while that makes a difference; over the long-term election results do not have a direct impact on market returns.
Want to hear more about our investment approach? Contact Claris to learn how to Understand. Invest and Relax.
Chart Source: Dimensional Fund Advisors. Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.