“What will happen to my investments if [the candidate I dislike] becomes President?” This is a question I hear frequently during any Presidential election year and especially in contentious times. People are always worried that if the candidate they oppose becomes President, it will be devastating for the markets and their portfolio. It’s hard not to be tempted to “do something.”
Here’s what we’re doing to protect our own investment portfolio from a possible election day disaster: nothing. We don’t believe that either a Biden or a Trump win will make any long-term difference to a diversified investment portfolio or to the US stock market.
We’re not the only ones that feel this way. History finds that markets don’t care very much about what political ideology a President subscribes to during an election.
According to a 2019 Dimensional Funds report, the U.S. stock market has been positive overall in 19 of the last 23 election years from 1928–2016, only showing negative returns four times. Looking to the year after the election, we see negative returns more often, 10 of the last 23 elections, but without any predictable pattern based on candidates or their parties.
However, perhaps surprisingly, markets have historically preferred Democratic Presidents over entire terms. Since 1929, the total return of the S&P 500 has averaged 57.4% under Democratic administrations, versus just 16.6% under Republicans.
After a Presidential election, stock market returns tend to be slightly lower for the following two years, while bonds tend to outperform slightly after the election. For the two years before a Presidential election, stock market returns tend to be higher. Interestingly, it doesn’t seem to make much difference which party takes office.
There is a slight difference, however, if the political party in control of the White House changes. With a new party coming into power, researchers found that stock market gains averaged 5%. With the same President re-elected or the same party retaining control of the White House, returns were slightly higher, at 6.5%.
With great trepidation, I am sharing the results of some research I did on both candidates. Despite much of the rhetoric, when it comes to the economy, both candidates are more centrist in their views. Both of them:
- Support capitalism and free markets
- Support strengthening small businesses
- Are likely to support highly-skilled immigration initiatives
- Support future fiscal stimulus
- Are fairly pro-international trade
- Oppose Medicare for All and favor improving the current system
- Lean pro-military and military spending
The candidates differ on taxation and regulation. Trump wants further cuts in taxes while Biden wants to roll the tax cuts back to what they were under the past two Presidents. Trump is more pro-business and anti-regulation than Biden.
Presidents don’t run the economy any more than they run the Congress or the Supreme Court. While they may have some influence over all three, that influence goes only so far. Executive Branch powers include foreign affairs, ordering military actions, and making appointments to the courts.
While the President has an influence on the economy, it isn’t the major impact that the media or either political party make it out to be. People think a President has great power to fix an economy. Even Presidential candidates believe their own rhetoric around what they can accomplish—until they take up residence in the Oval Office and discover the plethora of constraints that mute their power. This is how the founding fathers designed our government, which is actually a good thing (remember studying the “balance of powers” in your 5th grade civics class?).
That is why, viewed in the context of your portfolio designed to achieve your long-term goals, you need not worry about who becomes President in November. Could there be some short-term swings in the stock market? Certainly. Will the name and party affiliation of the next occupant of the White House make a difference in the long run? No.
As usual, the best way to election-proof your portfolio is to ensure it still reflects your goals and then leave it alone.