What will the presidential election mean for the markets?
For those who follow politics, it can be an emotional and frustrating experience. It’s become even more so lately as the news cycle is continual, ubiquitous, and social media spreads news (and lies) more rapidly. Not even to mention the commercials from lobbyists, third parties, and foreign actors injecting their biases, opinions, and interpretations into the mix.
We can get caught up in the mess and carried away in stories. It can seem like any small thing will mean the figurative end of the world, drop of the markets, or economy. I’ve been a financial advisor for twelve years now, and have seen this repeat over and over. Presidential politics can guide how some identify themselves.
The reality is, while presidents can be influential and make changes, congress makes the laws and it usually takes long periods of time for these things to come into play in the economy. When Donald Trump was elected, some folks freaked out because he was perceived as such a different president than we’ve ever had and they sold their investment accounts. Very quickly, this proved to be a bad decision for those looking for long term growth.
I see this again with speculation that if Joe Biden is elected, the markets and economy will crash. While anything is possible and no one can accurately time the markets with regularity, I think you will be better off to follow your financial plan and stay invested if that’s what the plan says, not on speculating about politics.
To help illustrate this point, this blog is dedicated to summarizing a (more detailed) report produced by Invesco about election truths.
Every election cycle, large investment firms publish political and market correlation statistics and presentations. Here is a summarization of some of my favorite points from a presentation by Invesco called 2020 Election: 10 Truths No Matter Who Wins. Here’s a link to their site if you’d like to view the entire presentation.
I’m going to emphasize some of their points, but it’s a great presentation overall. If you have the time and interest, I’d recommend checking out the full piece.
Invesco’s The 10 Truths
- Markets have performed well under both parties.
- Investors are better off staying fully invested.
- We do not radically re-engineer the US economy.
- The historical narrative is not as you remember it.
- Signature legislative achievements are infrequent, and the impact is not always as expected.
- Predictions tend to be wrong.
- Monetary policy matters more.
- It’s okay if you don’t like the President. The market doesn’t care.
- No, this is not the most vitriolic election.
- Don’t confuse partisan politics with market analysis and keep your eye on one indicator.
Markets have performed well under both parties.
This is one of the areas I see a lot of bias. Folks believe one party or the other has better performance. Like I mentioned earlier, I saw folks act it out when Trump got elected and now I hear others saying the same thing about Biden getting elected.
I’ve heard Republicans say they don’t like Trump as a person, but they like what their investments have done. That’s great, but looking at the data, the markets did better under Obama. As a Republican, did you vote for him based on your account performance? Was that enough to sway your vote at the time? I don’t want to get political, but it’s a fallacy to think voting one party of the other will help your investments more than the other.
Investors are better off to stay invested.
With political expectations or any event, the market’s reaction is practically impossible to predict repeatedly with accuracy. Please stop trying. If you get it right, that’s awesome, but you won’t every time and the times you miss will hurt more than the benefits from getting it right. Market timing does not work and complicated events have unpredictable ramifications.
Predictions tend to be wrong.
Again, if you had market expectations tied to politics, the last two administrations are anecdotal evidence of it being wrong. The last two presidents were dramatically different politically and the markets have done exceptionally well during both. You must acknowledge that if you want to believe one political party or the other is better for markets, the statistics and history don’t back that up. It’s a claim not based in facts.
Monetary Policy Matters More.
“Don’t fight the Fed”, as they say. Remember, politics have little influence on the markets and market performance. As presidential politics do not correlate with market performance, the Fed’s policies do correlate much more to markets. The simplest explanation why is as interest rates increase, bonds are more attractive compared to stocks, so demand for stocks decreases, so the markets are affected.
Markets don’t care if you like who’s president.
It’s true – they don’t.
No, this is not the most vitriolic election.
Elections, politics, campaigning – these have always been nasty. Have you seen the play Hamilton? I think they provide an example of this in an entertaining way and there are many other examples of past elections where major shade was thrown. It’s not pleasant, but it’s effective so campaigns keep selling it.
Don’t confuse partisan politics with the market analysis and keep your eye on one indicator.
I think the most important point to all this is largely, in the near term, politics don’t affect the markets. Yes, the markets will react to a weird tweet, or shocking or unexpected news. It takes years for the effects of legislation to be realized in the economy. Some laws don’t come into full effect for a number of years, some are just hard to connect from law to how it works down to the investment world.
Whether or not you like what’s happening politically, remember, you probably won’t see the real effects for a long time on your investments and the markets.
That said, the Misery Index does have a pretty strong positive correlation to political outcomes. The theory is essentially that if people are feeling more “miserable” they won’t reelect the incumbent because they want to get away from the misery their feeling. There’s a positive correlation, but that is not a guarantee. This correlation just happens to be one of the more reliable ones observed in the past. Could be something to keep an eye on.
There’s little correlation between politics or elections and the markets. While actions presidents take may cause short term market movement, the reality of the economic effects takes years to play out.
If you really want to effect political change, you need to take action and not be a spectator. Vote. Volunteer to help on a campaign. Run for office. Watching the news will only stress you out, especially if you think the person in charge is manipulating your investment accounts.
If you’d like to discuss your financial situation or create a financial plan, Telos Financial would be glad to discuss a possible relationship with you. Contact us today to schedule a no cost or obligation introductory meeting. Telos is a fee based, holistic financial planning firm serving Michigan’s high income and high net worth professionals, millennials, recent college graduates, and small business owners.
Thanks for reading the latest edition of Planning for your Purpose, Telos Financial’s blog, where I discuss different topics related to financial planning. CERTIFIED FINANCIAL PLANNER™ professional Dennis LaVoy is Plymouth, Michigan’s holistic financial advisor serving clients throughout the mitten as well as across the country.
The primary purpose of the blog is to introduce financial planning concepts and questions I receive from clients that I believe are important. I want to start discussions that will educate, benefit, and improve your financial life, ultimately, to help you focus on your telos!
Telos Financial is located in Plymouth, Michigan and focuses on serving young professionals and their families. Dennis LaVoy is a Certified Financial Planner® Designee and a Chartered Life Underwriter®. Dennis founded Telos Financial and to provide fiduciary financial services to families across Michigan including Plymouth, Canton, Ann Arbor, Detroit, and as well as all over the great United States of America.