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Third Quarter 2020 Newsletter - The Election Issue
Our research shows that Harry is an ineligible voter.
So it is every four years: investors try to anticipate how various election outcomes will affect the economy and their portfolios.
Enter we dutiful financial planners with our quadrennial, election season newsletter. We endeavor to be politically agnostic – just like economic history itself. We do this despite a painful 2020: the ongoing, global pandemic, growing tribalistic divides throughout society, and all else that leaves you angry or numb.
Though politics provokes strong emotions and biases, the investor piece of us should tune out the noise and focus on the long term. Historically speaking, elections have made little difference when it comes to long-term investment returns.
Most folks come to their choice of presidential candidate emotionally and in accordance with their values or identity - not on election day but perhaps as early as birth. While explaining our highly subjective choice to quarrelsome Uncle Charlie, we might dress up our vote by espousing armchair economics, including stock market predictions. Fortunately, or unfortunately, the stock market is not a barometer of economic or social justice. It’s, well, it’s something else to ponder another day.
Despite what we and sparring Uncle Charlie have said of the candidates, no party is foresworn to destroying the economy. Both parties make the perennial promise of “a chicken in every pot and two cars in every garage” - a slogan from the 1928 Hoover campaign that took on painful irony four years later.
Which party is in power hasn’t made a meaningful difference with the performance of the stock market. Over the last 90 years, there have been seven Democratic and seven Republican presidents, and the general direction of the market has always been up. (Click here to survey thumbnail histories of those 15 presidencies – something like a digital deck of baseball cards but with stats on the stock market, unemployment, GDP, and inflation, etc. during the administrations of Hoover through Trump).
Furthermore, stocks have done well regardless of the partisan makeup of Washington. Since 1933, there have been 42 years when one party controlled the White House and both chambers of Congress at the same time.
During periods of unified (one-party) government, stocks have averaged 10.0%.
A nearly identical average gain was achieved in years when Congress was split between the two parties: 10.4%.
Historically, the “least good” outcome has been when Congress is controlled by the opposite party of the president: a 7.4% average return (source: Capital Group).
This year we might see a Democratic sweep of the White House and Congress, a “blue wave” that would lead to a reversal of policies like deregulation or the mega-deficit inducing Tax Cuts and Jobs Act of 2017.
It would over-simplify stock market complexities to assume reversal of tax cuts would lower stock prices. In fact, past tax increases under Presidents Reagan, George H.W. Bush, and Bill Clinton did not derail overall economic growth but reeled in unsustainable tax cuts and their concurrent threat of inflation and higher interest rates.
How tax revenues are spent – fiscal policy - can bolster the economy, too, as the Democrats are making paired promises of increased taxes and infrastructure spending. Each party has its favorite economic researchers who, if all in the same room, sound like dueling astrologists. Seriously, these dry forecasts begin to separate policy pragmatism from campaign hooey.
Staying invested should matter more to investors than election results. Research shows those who stayed fully invested throughout the four-year presidential term tend to outperform those sidelining cash in an election.
A look at past election cycles shows that controversy and uncertainty have surrounded many campaigns, such as Nixon-Kennedy (1960) and Bush-Gore (2000). Yet with each election, the market continued to be resilient. By maintaining a long-term focus – say, three years and longer - investors can position themselves for a brighter future regardless of the election outcome.
We can’t control the stock market nor predict recessions and recoveries. However, clients with a long-term investment strategy are in control and enjoy greater confidence - before, during, and after a crisis. With proper diversification of various stock and bond funds, they have prepared for a range of outcomes to weather the latest crisis and the one that will come after that.
Possibly, the next crisis centers on the integrity and acceptance of the 2020 election which is threatened from both here (voter suppression and intimidation) and abroad (Russian misinformation and computer hacking). How much this might affect the economy and financial markets are hard to estimate for the smaller part of us we call “investor.”
But as patriots - that larger part of who we are individually and as a nation - we give voice to our values and highest ideals through the vote. This year it means completing an absentee ballot at the kitchen table when quarrelsome Uncle Charlie is not around. During the pandemic, every American, regardless of politics, has the additional duty to prevent the spread of Covid-19, i.e., wearing a mask and so forth.
It would be fatuous of us to gloss over the deeper-than-ever divide among Americans. According to Pew Research, about 80% of both Biden and Trump supporters said they “fundamentally disagree in core American values and goals” with supporters of the opposing candidate.
However, the same poll reflects that we possess a profound desire for national unity: “89% of Biden supporters and 86% of Trump supporters say that if their candidate is victorious, he should focus primarily on the concerns of all Americans - even if it means disappointing some of his supporters.”
As always and especially during these difficult times, we are here to talk through your financial plan, portfolio strategy, and any other way we can be of help. Call anytime, even if you need to let off steam about politics – but not before mailing your ballot.
Stay safe, stay well, and vote!