Chart of the Month
Written By: Fairvoy Private Wealth, LLC.
Published: September 2024
As the 2024 presidential election approaches, Americans are preparing to vote in what polls forecast to be a tight race. Like many investors, you may wonder how the election outcome could affect financial markets and whether you should change your investment strategy. While elected leaders can influence economic growth by enacting laws and regulations, data suggests that who occupies the White House has little to no impact on investment performance. Fundamental factors like corporate earnings growth and valuations impact the stock market far more than political headlines. Politicians make many promises during election years, but these often go unfulfilled because of the government’s system of checks and balances. Moreover, the economic outcomes of policies are less predictable than officials think, with the economy more influenced by factors like job growth, interest rates, and inflation. Here are a few keys points to remember about mixing politics and investing:
The Market is Not as Politically Sensitive as it Appears
While political events and policy changes can have short-term effects on the stock market, they often have less impact on long-term market performance than many investors think. Historically, markets have thrived under both Republican and Democratic administrations. In fact, the market’s ability to adapt and grow over time demonstrates that it is driven more by economic fundamentals—such as corporate earnings, interest rates, and global trade—than by politics alone. The chart on the left graphs the S&P 500 Index starting with Dwight Eisenhower’s presidency in 1953 and is color-coded by political party, generally rising under either party as president.
Emotional Investing Leads to Poor Decisions
Political developments can evoke strong emotions. Whether it’s optimism about a newly elected leader’s policies or fear about potential regulation, emotions can cloud judgment. Investing based on emotions rather than rational analysis often leads to impulsive decisions, such as selling investments during market downturns or missing out on opportunities during periods of uncertainty. This type of reactionary investing can result in buying high and selling low—exactly the opposite of what successful investors aim to do. Attempting to time the market based on political events is an extremely challenging endeavor. Predicting how markets will react to political news requires not only an accurate forecast of political outcomes but also an understanding of how investors will perceive and react to those outcomes. History has shown that markets often behave unpredictably in response to political events. For example, despite the uncertainty surrounding events like elections or geopolitical tensions, markets have frequently demonstrated resilience and, in some cases, unexpected growth.
The graph on the right compares the investment performance of portfolio decisions made based on political affiliation. If an investor only invested in the stock market when a Republican was President, $10,000 would have grown into $83k today, excluding dividends. Investing only when a Democrat was President would have returned $254k. While the gap may seem wide, if an investor ignored the president’s political party and remained invested, the $10,000 would have grown to over $2.1 million. The data only looks at performance based on who won the presidency, not the Senate or the House of Representatives.
Focus on Long-Term Fundamentals
Retirement investing is a long-term endeavor. While political events can create short-term market volatility, long-term market growth is driven by economic fundamentals such as innovation, productivity, and corporate earnings. By maintaining a focus on these underlying factors, rather than getting caught up in political noise, investors can better position their portfolios for sustained growth over time.
Conclusion
Political views can stir strong emotions but making investment choices based on those feelings can lead to poor portfolio decisions. Instead, it’s better to focus on time-tested investment principles and avoid letting politics influence your long-term strategy. The U.S. economy’s success, growth, and resiliency don’t change with each new election, and neither should your investment strategy. It’s best to express political opinions at the ballot box, not in your portfolio.
Important Disclosures
The information and opinions provided herein are provided as general market commentary only and are subject to change at any time without notice. This commentary may contain forward-looking statements that are subject to various risks and uncertainties. None of the events or outcomes mentioned here may come to pass, and actual results may differ materially from those expressed or implied in these statements. No mention of a particular security, index, or other instrument in this report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security or index. The report is strictly an informational publication and has been prepared without regard to the investments and circumstances of the recipient.
Past performance does not guarantee or indicate future results. Any index performance mentioned is for illustrative purposes only and does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Index performance does not represent the actual performance that would be achieved by investing in a fund.