Political strategist James Carville famously said in 1992, “It’s the economy, stupid.” He was encouraging staffers for Bill Clinton to highlight the economy, thinking it would help turn voters against incumbent George H.W. Bush.
The economy is always a major part of election debates, as jobs, taxes, and yes, even the balances of folks’ 401k investments are brought into the discussion. Leading up to national elections, many people tend to be on edge, especially in these highly divisive times. Investors are no different and worry things will be “much different” economically if their preferred candidate doesn’t get elected, which could wreak havoc on the capital markets and one’s investments.
But is that true — should people be nervous about their investment accounts during presidential election years? The data says NO, calm down, people!
Historically, once nominees are identified, markets tend to regulate, and then in the 12 months following primary elections, they tend to bounce back. In fact, according to a recent report from Capital Group, since 1932, stocks have gained an average of 11.3% in the 12 months following the conclusion of the primaries (using May 31 as a proxy) compared to just 5.8% in similar periods of non-election years.
With few exceptions, national polls should be treated with skepticism in how they could impact the stock market. Don’t put too much emphasis on political parties because companies’ stock prices depend primarily on fundamentals. I always tell clients, “The markets couldn’t care less about politics, politicians, or political parties. What markets do care about is policy!”
During elections those running for re-election are incentivized to craft a positive spin on the economy and try to stimulate it where they can. This could be smoke and mirrors, but it often works, and they’re able to convince some that they deserve votes because of the policies they implemented. Then, once the results are final, there’s usually a sense of optimism which makes its way through the equity markets anticipating constructive economic change because of the newly elected candidate — or that status quo is best for the economy and the politician getting another term is a good thing.
I often think many underappreciate the sheer genius our forefathers had when implementing our government. Due to the democratic-election process, at least half of voters are left feeling the country is headed in the right direction. This optimism flows through to many places within the economy, including the stock market. That is why the markets traditionally do well leading up to and shortly after elections.
Then the hard work begins. Mr. Smith goes to Washington and creates policy meaningful to the economy and markets. That takes months to draft, then is balanced by the Congress, the courts, and the Federal Reserve Bank. Our founding fathers had the foresight to create checks and balances to keep policy fairly level and prevent tyrants from pushing through their agenda unchallenged.
Investors who share an affiliation with the political party in office are more likely to believe financial assets are undervalued and respond by increasing their allocation to equities. In behavioral economics, this phenomenon is known as “confirmation bias,” and it could be dangerous for investors.
Conversely, investors disappointed with the outcome of an election often adopt a risk-off strategy and take refuge in fixed income securities. While that type of impulse may be less costly when yields are high, it runs the risk of distorting longer-term asset allocations.
Remember that in a two-party system where the sides are fairly even in voter numbers, about half the people who voted are optimistic that the economy will be in positive territory, despite the bias they may feel against the opposing party. Cooler heads tend to prevail.
The strength of the American economy and of our democracy has traditionally kept things moving up, despite which administration is in office. The difference is growth may shift sectors a bit. Some sectors do better during Democratic administrations, others do better during Republican ones.
Ultimately, a free-market society thrives on corporate earnings and fundamentals. Don’t let the acrimonious aspects of election years or your own personal biases lead you to have an emotional response to the stock market. Getting stressed out is not productive and worry doesn’t change anything.
Just vote with your conscience because that’s all you can do — and then work with your financial advisor to develop an individual plan that works for you and your family’s long-term goals and needs. Be confident that, while some fiscal and regulatory policies can affect the performance of individual investment or asset classes in the short run, longer-term portfolio construction is best treated as an apolitical exercise.
Turn the news off. Take a couple deep breaths. And whatever you do, don’t make a hasty decision that could have lasting repercussions on you and your family’s financial future, due to something that has nothing to do with XYZ stock’s product or service.
Luke Ervin is a senior vice president with UBS Financial Services and is a senior member of the firm’s Mission Family and Business Group in Carmel Valley. He oversees financial affairs for business owners, entrepreneurs, corporate executives, professionals and their families.
