Politics and Portfolios Don’t Mix

Key Takeaways:

• Develop a robust, diversified portfolio aligned with long-term financial goals.
• Maintain discipline during short-term volatility to capitalize on long-term gains.
• The outcome of elections often triggers fear-driven media speculation, but investment decisions should be based on long-term historical evidence, not emotions.
• Politicians get too much blame and too much credit for economic and market outcomes

With the 2024 presidential election just months away, you can expect to be flooded with opinions on how the outcome will affect your investment portfolio. Media pundits understand that level-headed, objective reporting of the financial markets does not sell ads—fear does! Understanding market history and the impact of elections can provide timeless truths. Investment decisions should always be made based on long-term historical evidence, not emotionally driven reactions.

The uncertainty of the upcoming election poses a common question for investors: What should we expect from the markets given the different outcomes?

Are Republicans or Democrats Better for Stocks?

In the graph below from Y-Charts we look at the S&P 500 (a broad measure of the U.S. stock market) starting at John F. Kennedy’s inauguration.  The U.S. market has experienced negative returns under only two presidents: Richard Nixon and George W. Bush. Investors in either party may fear that the next administration in Washington will negatively impact their investments.

Y-Charts

Examining the S&P 500 from 1950 to March 2024, we assume an investor who starts with $10,000 and stays in cash outside of their party of choice’s presidency. Under Republican presidencies and cash, this would have resulted in growth to just above $77,000, with an annualized return of 2.80%. Under Democratic presidencies and cash, the growth would have been over $405,000, with an annualized return of 5.11%. The punchline here isn’t that Democratic presidencies are better for investment returns; it’s that staying invested in the market across all regimes produces outsized returns. Staying invested would have resulted in growth of $10,000 to $3,154,000, with an annualized return of 8.05%.

Y-Charts

Government Compositions and Market Returns

Taking this analysis a step further, we can look at S&P 500 returns under six different possible government compositions from 1950 to 2023. Lower returns have been observed under a Democratic-controlled House and Senate, while higher returns have been experienced under a Republican-controlled Congress. Higher returns have also been produced under both parties when Congress has been divided. Nonetheless, the market has experienced positive returns under all six variations of government.

Y-Charts

The Cost of Timing the Market

Media sensationalism and market volatility can scare investors into making poor decisions. While fleeing to safe assets like cash may feel rational or prudent, moving to cash requires you to be correct twice: once when selling at the highs and again when buying back at the lows. You risk the market continuing to rise, forcing you to buy back at a higher price. While recoveries can never be guaranteed, withdrawing from the market voids any potential participation in a recovery.

A graph below from Fidelity Investments illustrates this point. Looking at the hypothetical growth of $10,000 from 1980 to 2022, missing just the 5 best-returning days would result in over $400,000 of lost total return. This effect multiplies to over $1,000,000 of lost return if 50 of the best days are missed. The hardest part of being a long-term investor is exercising discipline during short-term periods of volatility and uncertainty.

Fidelity Investments

Presidents’ Effects on Markets

While politics may significantly affect our daily lives, long-term stock market returns are less impacted by politics than many people believe. The president is just one of many factors that affect market returns. Each administration comes to office with a different agenda, and we don’t know which policies will be implemented or which industries and sectors will ultimately become winners or losers. Policy takes time to enact and see effects. Specific sectors of the economy may change, creating a new set of winners and losers. Sector volatility can highlight the benefits of a well-diversified portfolio, offering opportunities for disciplined rebalancing and buying assets at depressed prices. Politicians get too much blame and credit for economic and market outcomes. The truth is the vast majority of of economic and market events can be attributed to private businesses and individuals who wake up everyday focused on solving the set of problems in front of them and moving the economy forward to improve their standard of living and the prospects of future generations.

Conclusion

Let your political beliefs manifest at the polls this November, not in your investment portfolio. Rather than trying to time the market and make short-sighted bets, create a long-term plan to meet your goals with a diversified portfolio built to weather any political environment.