What Really Matters?

RENAISSANCE VIEW

It’s that time again… election time! A time when investors want to know how the market has done in the past based on what party is in the Oval Office. A time when investors try to anticipate what the market will do this time depending on who wins. And a time to consider how to potentially “election-proof” portfolios. We will cover these areas below, but be forwarned, if you do not like data, you may just want to just skip to the bottom.

Yes, the upcoming elections are highly anticipated. In fact, 83% of the general population believe this election “really matters”.ⁱ That’s the highest percentage ever. And we can see why. Issues ranging from economic, to social, to global, to local, to environmental have polarized voters like never before.ⁱⁱ The good news is that we do have the right to cast our vote. But as important as this election and our vote may be, it is our view that the outcome matters less to your investment portfolio than you may believe.

Consider these:

Since 1937, the Dow Jones Industrial Average (DJIA)ⁱⁱⁱ has gained +9.2% with a Democratic President, and has gained +9.1% with a Republican President, thru 12/31/19.^iv
Since 1937, the DJIA gained +10.0% when the White House and Congress were divided by party, and has gained +8.2% when both were ruled by the same party, thru 12/31/19.^v (If you include the Great Depression era from 90 years ago, the above numbers change, but that can probably be considered an outlier. And of course, past performance does not guarantee future results.)
87% of the time, when the stock market is up the 3 months prior to the election, the incumbent wins.^vi As of September 24th, the S&P 500 index^vii since August 3rd was down -1.1%.
Since 1932, there have been four elections when the incumbent endured a recession while in office, and each time the incumbent was not re-elected.^viii See chart below. Trump endured a recession in 2020.

To add to the previous point, if the DJIA declined 20% prior to the election (the DJIA was down -23% Q1 of this year), the incumbent was 0-6 for re-election.^ix

We could continue to bisect and disect this, but what should we take away from all of this? One message is that, while investors can lose money in individual stocks over short or intermediate or even long periods of time, the stock market in general tends to trend higher over the long term, regardless who the President of the United States is and what political party he represents. Also, the statistics nerd in me wonders, is the sample size we are using even large enough to try to assume with confidence anything going forward? There have only been 21 presidential elections since 1932. I recall my stats professor saying at least 30 observations are needed to make a test valid, or something like that, but let’s not go there. How relevant, however, are elections that occurred 90, 70, or even 50 years ago? The world has changed. Conditions and drivers of economic growth have shifted. Technology has advanced us past the Industrial Revolution. We’ve learned lessons from crises of the past. Other than maybe raising or lowering taxes, has the president really driven much of any change to speak of? (Jokes of Al Gore inventing the internet aside.)

Our primary point is that economic cycles run independent of any political party. Stock prices fluctuate daily from factors such as headlines (including elections), money flows, momentum, earnings reports, and analysts upgrades and downgrades. This volatility can be unnerving, but it can also create opportunity.

You want to try to “election-proof” your portfolio? Consider the last election. Hillary Clinton was leading the polls, and the stock market viewed her more favorably, in part, perhaps, because we knew more about her. Donald Trump was a wild card at the time, and the market was not comfortable with that uncertainty. The stock market was up on the Hillary sentiment and expected to fall if Trump won. As election night results were confirmed, stock futures fell hard overnight, then stocks rallied strong in the days after. Had you predicted a Trump win, and went to cash, and waited for weakness, you were right, but you were sorry. And then, what was your plan to redeploy that cash? The point is that managing your portfolio based on the election is a short-term, high risk, unpredictable decision.

As for the candidates this year, you can visit the Trump and Biden websites to see what they stand for, if you don’t already know. There are actually a few common threads. Trump/Pence and Biden/Harris both believe that some form of monetary and/or fiscal stimulus may help the economy near-term. They both endorse spending on infrastructure. They both take a tough stand vs. China. They both want more U.S. produced goods in the U.S. Then there are obviously differences. We’re not here to debate their views. Our goal is to try to determine what “really matters” from an investment perspective.

It is debatable, though, whether we are currently at the end of or at the beginning of an economic cycle. We were certainly toward the latter stages of one last year. Generally, a recession resets the landscape. In reality, the end of one cycle bleeds into the beginning of another, so call it what you want, but we are most likely not at a peak given high unemployment levels. Over longer periods of time, stocks and the stock market in general, are driven by economic growth and corporate profits. And those profits are generated by fundamentals such as revenue growth, product innovation, and margin improvement, to name a few. Presidential policies may influence some industries and some companies, both positively and negatively, but companies can adapt, and a diversified portfolio can both perform well and serve as a potential buffer to adverse events.

Leading up to election day, and even past then, as results are counted and potentially contested, we would not be surprised that market volatility increases due to anxiety, uncertainty, and maybe fear and confusion… all of which are emotions. We know by now that a successful long-term investment strategy cannot be driven by emotion. Talk to your advisor or financial professional about what “really matters” to you.

As always, thank you for letting us help guide you toward your financial goals!

Gary Orf, CFA^®| Chief Investment Officer | Renaissance Financial

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