Election results should not impact investment strategies
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Key takeaways:
- Investors have consistently made money during both Democratic and Republican presidencies.
- Data dictate supporting a divided Congress.
A common question we receive every 4 years is: How will the election impact my investments?
When a presidential election is upon us, many investors become concerned and attempt to assess how the candidates’ policies will impact their portfolios. As humans, our views are shaped by personal experiences and those experiences often influence our political beliefs. A challenge we face as investors is that our political biases can affect our economic sentiment. If you disagree with the political party in power, you will likely have a pessimistic market outlook.
Rather than adopt a subjective political stance on economic policy, we researched data and wanted to share our findings. Keep in mind that we have a relatively small sample size, considering presidential elections occur every 4 years. We reviewed more than 70 years of data on 12 presidential cycles. Performance was assessed using the S&P 500, meaning any references to the market will be to the S&P index.
Investments remain consistent
The first piece of advice is not to overthink the election. Investors have consistently made money during both Democratic and Republican presidencies. From 1950 to 2023, the market has modestly outperformed during Democratic presidencies but not by a significant enough margin to draw a decisive conclusion. We will dissect the numbers later in the article.
Starting with John F. Kennedy’s inauguration in 1961, there have been six Democrats and six Republicans in office. The market has experienced positive returns in 10 of the 12 presidencies.
It is important to remember the president of the United States has limited authority to enact change and most new laws take years to pass through Congress. The Federal Open Market Committee sets monetary policy, acting as an independent agency and requires federal government approval to institute change. While the president of the United States holds the highest office in our nation, the president’s impact on stock market performance is often overstated.
Remain invested in all presidencies
For some investors, partisanship becomes so consuming that they consider investing only when their preferred party candidate wins the presidency and selling securities and going to cash as a safe haven when the opposition holds the position. How has this strategy worked out in the past?
Based on research from Y-Charts (Figure 1), if one invested in all presidencies during the last 74 years, a $10,000 investment in the S&P 500 in January 1950 would yield $3,278,000 by the end of the second quarter of 2024.
What if you sold your stocks and went to cash during these 74 years whenever your preferred party did not occupy the presidency? Implementing this strategy and remaining invested during Democratic presidencies, a $10,000 investment would have grown only to $421,450. The same strategy of investing only when a Republican is president would have resulted in just $77,770.
While one might conclude from these data that investing during Democratic presidencies is better than during Republican presidencies, we think the most valuable takeaway is the overwhelming benefit of remaining invested through all of them, rather than picking and choosing.
Support a divided Congress
If one is looking to vote purely based on past market performance, the data dictate supporting a divided Congress. Financial markets despise uncertainty. Volatility often increases in the months before an election as markets attempt to determine who will win the election and the future policies of the new president. Historically, the best scenario has been legislative gridlock as the best performance under both Democratic and Republican presidents during the period has been under a divided Congress (Figure 2).
From 1950 to 2023, the average annualized performance of the S&P was highest when there was a divided Congress when either party held the White House. The one outlier occurred in 2007 when Democrats took the House and the Senate under Republican President George W. Bush. The S&P started to collapse shortly after the election.
The U.S. financial crisis of 2008 was caused by the breakdown of the housing market, the failure of the rating agencies to assess the risk of sub-prime bonds, a poor job by the regulators, greed from financial institutions and consumers overextending themselves. These combined factors resulted in a series of layoffs, unfortunately impacting millions of people who had acted responsibly. Thus, the 2008 financial crisis was created by a series of issues much larger than a Republican president or a Democratic Congress. Consequently, we encourage investors to consider this unique event when reviewing raw data.
Conclusion
Historical data should be used to educate us about the past, and it should be noted that history does not necessarily predict the future — particularly when it relates to investment performance. However, we can use history to help us overcome personal biases or misconceptions.
- The stock market has thrived under both Democratic and Republican presidents during the past 74 years.
- Investors who have remained invested have experienced better performance compared with those who have only invested when their preferred party is in office.
- Markets have performed better under a divided Congress than when both Congress and the presidency are controlled by one party. One could reasonably conclude this is because the markets do not like uncertainty and generally prefer to avoid drastic policy changes.
We hope you found this information useful and made our best effort to provide a nonpartisan perspective. Our goal is to make readers better informed and more successful investors. For further questions about the content of this article, please contact us.
References:
Mandell and OJM Group partners are pleased to announce the 2024 publication of our newest book, Wealth Strategies for Today’s Physician: A Multi-Media Playbook. The playbook’s innovative format features more than 90 links to videos and podcast episodes to enhance important financial topics for physicians. To receive a free print copy or ebook download, text HEALIO to 844-418-1212, or visit www.ojmbookstore.com and enter code HEALIO at checkout.
For more information:
Sanjeev Bhatia, MD, is an orthopedic sports medicine surgeon practicing at Northwestern Medicine in Warrenville, Illinois. He can be reached at sanjeevbhatia1@gmail.com or @DrBhatiaOrtho.
David B. Mandell, JD, MBA, is an attorney and founder of the wealth management firm OJM Group www.ojmgroup.com, where Andrew Taylor is a partner and wealth advisor. They can be reached at 877-656-4362 or mandell@ojmgroup.com.
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