Monthly Markets Memo - August 25, 2020
by Dan Zalipski, CFA
The markets continued to slowly trend higher over the past month. Hope of a vaccine by year-end along with better than expected earnings helped drive the market higher. Stimulus talks stalled as both parties hold their ground for their respective proposals. Republicans want to see businesses protected from frivolous Covid-related lawsuits, while Democrats are pushing for additional aid for local and state governments.
President Trump signed a series of orders to release aid due to the stalling stimulus negotiations, but questions remain as to how the orders will be implemented and in what timeframe. Passing a potential stimulus deal has been pushed off until September.
Around this time every four years the inevitable question comes up, how will the election impact my investments? It is a valid question with armies of analysts and pundits endlessly dissecting data searching for an answer. The answer depends on how the data is analyzed, with ample opportunity to arrive at different conclusions. It is no surprise that party affiliates from either side will spin the data to support their cause, as demonstrated below. This leaves investors confused or fearful for what they should do.
Looking back all the way to 1789, during an election year the markets tend to perform better when a Republican wins the Presidency. However, fast forward to the end of the inaugural year, and contrary to what one may expect, the markets historically perform better under Democratic control. One theory is that investors begin to realize that it is unlikely that all the campaign promises will come to fruition, with markets responding positively as uncertainty fades. For example, as pro-business Republicans are not able to get as much done, the market’s optimism fades, which can lead to subdued returns. The opposite can be true for Democrats that are unable to advance social agendas or new regulations investors may fear, leading to an increase in optimism and market returns.
We know that elections determine more than just the President. Adding in the results of the Congressional races reveals yet another conclusion: The markets respond more to the makeup of Congress than who wins the Presidency and perform best with a split Congress. A split Congress results in legislative gridlock, with very little activity that would upend markets. Investors favor this environment due to its more predictable nature.
Expanding the timeline, an interesting trend emerges when analyzing a market return over the entire four-year term of a President. During the first two years of a term, there are significant differences in market performance between Democratic and Republican Presidents with a swept or split Congress. Those differences, however, all but disappear by the end of the fourth year with average market returns across these categories coming within a few percent of each other. Mid-term elections may play a role in smoothing out this data. Another potential explanation is that the market and economy are simply bigger and more influential on the political arena than the other way around.
In conclusion, there is one simple approach to all of this, do not play politics with your portfolio. Politics is an impassioned topic often engrained with deep-seated beliefs and emotion. Allowing your political beliefs to drive your portfolio decisions can result in investing errors that can become costly over time. Investors sitting out of the markets during the Obama years would have missed the S&P returning approximately 175%. Likewise, sitting out during President Trump’s on-going term would result in missing additional gains. In the end, with Congress having more of an impact than the President, the negligible differences in longer-term returns regardless of makeup combined with the raw emotions associated with politics leads us to believe making dramatic moves to your portfolio in anticipation of election results is not a sound investment strategy.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. Although general strategies and / or opinions are revealed, this post is not intended to, nor does it represent or reflect, transactions or activity specific to any one account. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All data and information is gathered from sources believed to be reliable and is not warranted to be correct, complete or accurate. Investments carry risk of loss including loss of principal. Past performance is never a guarantee of future results.