Should I Sell if "X" Wins the Election?

Editor’s note: We firmly believe that politics and portfolios must remain separate. As we will show below, decades of evidence show that mixing politics and portfolios is a toxic decision. By investing to accomplish personalized goals, we work past pessimism and the perception of challenging environments for long-term success.

It seems only fitting that 2020 should be capped off with a Presidential election. As we move closer to November 4th, investors begin to wonder about the investment ramifications of the election.

It’s natural to allow emotions to seep into decisions, whether they be financial or life related. In fact, we’ve previously written about how investors can use mental tricks to improve their investment performance. 

As politics instinctually result in a desire for emotional actions, it’s important to first analyze whether the stock market is materially impacted by one political party over another.

Which Party is Better for the Stock Market?

Since 1900 the US economy has lived through the Great Depression, two World Wars, stagflation of the 1970’s, dot com bubble, global financial crisis and, most recently, a global pandemic. These challenges have presented themselves across political parties and time, allowing us to see the impact of politics on markets.

So what would returns look like if investors only purchased stocks when their preferred political party was in office?

As highlighted above, an investor investing during only one political party’s power is an enormous mistake. If you simply think of a local company, no business owner decides to only grow during one presidential administration or another. That’s not how business works. 

For investors wanting to mix politics and portfolio, this chart proves "It's not timing the market. It's time in the market."

For investors wanting to mix politics and portfolio, this chart proves “It’s not timing the market. It’s time in the market.”

Does the Economy Do Better with One Party or Another?

While investors don’t have a crystal ball, business owners must be aware of how macroeconomic trends may influence their investments. It's natural to expect certain policies--be they from one party or another--to benefit the economy. 

So, which party is better for the economy?

In the chart below, annualized GDP growth is exhibited on the X-axis, with annualized stock market performance on the Y-axis.

The two outliers, Johnson and Kennedy were presidents during the tail-end of the baby boom. This represents more of a cultural shift to larger families than a distinct economic plan formalized by the two presidents. Nobody can logically argue that Johnson and/or Kennedy inspired this generational population boom. They were the mere beneficiaries during their presidencies.

Since we elect a Commander in Chief and not a Commander in Commerce, the President doesn’t have direct control over the economy. In fact, economic decisions often take years to take effect in the market. This time that passes can easily be between presidencies and political parties.  

What the graph shows us is that there is no statistical difference between Republican and Democratic presidents. It’s natural to believe there would be a difference, but this is why it’s critical to be evidence-based in our investments. 

Perhaps more importantly for investors, there is no clear link between the economy and stock market returns. Looking at returns over the past 50 years, there is no rhyme or reason to the relationship between stock market and economic returns. 

As 2020 has highlighted, the economy is not the stock market. While the economy is the status quo, stock market investors are focused on the future earnings and growth that they are buying.

The economy is not the stock market. While the economy is the status quo, stock market investors are focused on the future earnings and growth that they are buying.

This fact serves as another reminder that politics and portfolios have been two different arenas that don’t intersect as much as we’d expect. Moreover, even when a political policy has influence on the economy, that doesn’t necessarily translate into stock gains or losses.

And while these results may be surprising, we have to keep them in mind as the election draws closer.

Politics are emotional in nature, allowing one to express their beliefs on nearly everything. Removing emotions from the investment and financial planning processes allows us to learn from decades of evidence. These insights help us avoid the pitfalls of overreacting to geopolitical news and headlines.

This report was prepared by Delta Wealth Advisors, a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser.   

The information herein was obtained from various sources. DWA does not guarantee the accuracy or completeness of information provided by third parties. The information in this report is given as of the date indicated and believed to be reliable. DWA assumes no obligation to update this information, or to advise on further developments relating to it.

An index is an unmanaged portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown.