How Election Day Should (or Shouldn’t) Affect Your Portfolio
October 27, 2020 | BY Our Partners at Equinum Wealth Management
2020 has been a particularly trying year. The lockdowns, school cancelations, unemployment, and of course, the health crisis, have had an impact on even the strongest-minded people. To top it all off, it’s an election year. And not just any election year – one of the most divisive and heated ones in recent memory.
While the election outcome is important to us because it shapes national policies like immigration, healthcare and major social issues, from the feedback from our clients, it seems to also make an impact on people’s investment preferences.
Our clients are wondering: Should we make changes to our portfolio based on what we think the election outcome will be? Should we go to all cash until the election passes? Should the election results change our long-term investment plan?
These questions lie on the assumption that there is a certain party that is better for the market, but truthfully, it doesn’t really matter.
Since 1949 when Democrat Harry Truman was sworn into office, under Democrat presidents, the market has returned 10%. The return under Republican presidents during that same time frame has been 7.7%.
This might surprise you, as the accepted theory is that Republicans are more focused on capital, while Democrats are primarily focused on labor. What this should tell you is that the influence presidents have on the economy and the stock market is actually quite limited.
Each party brings policies that are both beneficial and unfavorable to the markets. And together, markets are built.
The bigger factor that drives the economy? Market cycles. The forces of market cycles override the political affiliation of the person occupying the White House. Bill Clinton was in office while the dot com bubble was happening, so he had amazing stock market years. George W. Bush came in at the peak of that bubble, and was in office during the great financial crisis, so he had terrible numbers. Barack Obama came in at the lows of that crisis, and guess what? His numbers were great. Obviously, market cycles play a much bigger role in the economy than the president’s party affiliation.
Even making bets on certain sectors or industries for a particular election outcome can prove to be costly. President Bush ran on promises for tax cuts, which were interpreted as bullish for the banks, but they did really badly under his tenure. President Obama was a big proponent of clean energy. While he was in office, solar energy (as tracked by the Invesco Solar ETF (Ticker: TAN)) and wind energy (tracked by the First Trust Global Wind Energy ETF (Ticker: FAN)) were both lower, while the overall market was on a tear.
So no, your investment plan should not be based on your prediction of who will take a seat in the Oval office or who will win the Senate.
The most important thing you can do to build wealth is to stay invested over time. To illustrate this, let’s assume you invested $100,000 in 1949, and only invested under presidents of a single party.
While you would have done much better under the Democrat regimes, with an ending balance of $2.9 million versus the $717,000 had you only invested during the Republican presidents, it’s incomparable to the $21 million you would have had, had you remained invested the entire time.
We’ll leave you with this: Many are predicting that we won’t have a peaceful transfer of power, which can create a lot of volatility in the market. As you know from our previous missives, we aren’t in the prediction industry. But should that occur, we’ll be ready to pounce on the opportunity it brings.