Video Transcript
Hey guys, Mike Frontera here back with another Retirement Theory video. During election cycles, clients are always asking how they should change their portfolio to handle the fallout of whoever gets into power. I have many deeply convicted Republican and Democrat clients who are convinced that if the other party were to win, it would spell disaster for the world and for their portfolios. And I will almost always give the same advice. Don’t let the election have any influence on your long-term investment strategy.
So why is that? Let’s look at some evidence to back that up. First, if you are saving for a major purchase or will need to withdraw funds in the months leading up to or after an election, volatility is not your friend. That money probably shouldn’t be in the market. But that has nothing to do with the election itself. It’s because markets by their nature are volatile. And so, they do not generally make for a good store of value when that money will be needed in the short term.
That said, historical data does not suggest that volatility around an election year is any higher versus other years. Look at this chart from T. Rowe Price, which goes back 96 years. If we look at time periods surrounding the first Tuesday in November for every year, it does not seem that volatility is any higher every fourth year when a presidential election occurs. The markets might feel more volatile, but on average they’re actually less. Only here, at one year out from an election and here, at one month after the election do election years average higher volatility. In all the other periods, volatility is higher in non-election years.
Maybe you’re not worried about short-term volatility. You’re more concerned about the direction of the country in the long term and how that will affect your portfolio. And you’re worried because if the other candidate gets in, our country will be on a sure path to economic ruin. At least that is the warning we hear from our party about the dangers of the other guy getting in. Does the president actually have that much influence over the direction of the market?
Well, presidents likely do have some influence on the economy. More so if their party also controls Congress, as they can push the legislative needle more one way or the other. Presidents nominate the Federal Reserve chair, who sets monetary policy. That can certainly influence things. But how much that needle moves and how much impact, good or bad, on the market, is a much harder thing to predict.
It often seems like presidents have more influence simply because they tend to get the blame, or credit, for how the market and the economy are doing in the court of public opinion. But how much could the last several major market downturns actually be blamed primarily on the US president? Was the bursting of the tech bubble and the subsequent bear market during the early 2000s due to Bill Clinton’s policies? Or were there other, bigger, factors at play? Such as the “irrational exuberance” of investors speculating about the promises of the Internet. Giving sky-high valuations to completely unproven dot-com companies, in the hopes of getting rich along the way, certainly seemed to have a bigger effect. And did the market continue to struggle because of George W. Bush’s policies or because of the terrorist attacks on 9/11 that no one could have possibly predicted?
What about the housing crisis? Was that George W. Bush’s fault? Or could you point the finger at banks who gave mortgages out without sufficient qualification standards? Or to home buyers who bought more home than they could afford? To home builders who went on a building spree that outstripped demand? Or to the packaging of loans into highly-rated investment products, that hid the risks of those underlying mortgages.
What about the market during 2020? Another completely unpredictable situation with COVID, that caused the entire world to shut down, with impacts across every facet of the global economy. Was that Donald Trump’s fault or Joe Biden’s? Depending on your perspective your mind may instinctively go to one or the other. The reality is that there are so many other factors at play. How about the ensuing inflation and market downturn in 2022? Again, which president do you blame? Well, the reality is that almost every developed country on earth has been battling inflation in the aftermath of COVID.
Take a look at the list of G20 countries and their current inflation rate and COVID peak. It’s clearly not a US issue alone. Our president only has so much influence on the global supply chain. And only so much influence on other forces that steer the market like Russia’s invasion of Ukraine, the major advances in artificial intelligence, cryptocurrency speculation, and worldwide changing demographics.
But maybe this time is different? Well, I cannot remember any election over the past 30 years where both parties didn’t constantly declare that “this is the most important election of our lifetimes.” Yes, presidential policies can set some of the tone for a business environment, but they are just one of the innumerable other macroeconomic variables at play.
So how could you possibly know when to keep invested and when to pull out, depending solely on who is president? The reality is, you’re more likely to do yourself harm than good by taking your chips off the table if your candidate isn’t the one who wins. Check out these two charts from iShares. If you had invested $100,000 over the 10 years ending 12/31/2023, you’d have had more than twice as much money by just staying invested, versus investing only during Democrat or only during Republican presidencies. If you go back 70 years, the difference is staggering. And as you can probably see….despite all these crises that we’ve been through, the markets continue to find new highs, even as we speak.
So, while it seems like the market will not survive if the wrong candidate gets in, the evidence shows otherwise. It seems the president’s actual impact on the global stock market is quite debatable. And more importantly, it’s unpredictable. As a disciplined, long-term investor, rather than timing the market, your best bet, as always, is time IN the market.
Have questions for me? Let me know. Come visit me at www.retirementtheory.com or send me an email at mike@retirementtheory.com. Thanks for watching. See you next time.