Political parties
We’ve reached that point in the election cycle where the same questions are surfacing in our conversations with clients. “How will the election affect the stock market?” or “Should I get out of the market until the election is over?” These are valid questions and we welcome these conversations; however, politics has less of an effect on the economy and the markets than the media leads us to believe. As you can see from the chart below, the market is pretty consistent across presidential terms, returning an average of 10.3% per term.
S&P Index Graph
The return data may come as a surprise to you depending on your political leaning. You’ll be even more surprised when we look at annual return data. Conventional wisdom says Democrats are generally bad for the economy and the stock market because of their big government tendencies and high tax preferences, while fiscally conservative Republicans are good. Well, this widely accepted belief is actually misleading based on annual data going back to the end of WWII. From 1952 through June 2020, annualized real stock market returns under Democrats have been 10.6% compared with 4.8% for Republicans. (Source: Forbes, “Historical Stock Market Returns Under every President,” Klebnikov) We do not think this implies cause and effect, however, since the economic cycle does not take heed of the election cycle. Some presidents take office during prosperous times while others take office during disruptions beyond their control. Rather, we believe these return figures simply suggest that you cannot rely on political circumstances to make investment decisions.
Market Returns graph
Since Apple just recently became the first public company to cross the $2 trillion milestone, let’s celebrate their accomplishment by using them as an example of why politics shouldn’t dictate investment decisions. A little over a decade ago, analysts were worried that Apple’s best days were over as it had lost the ability to innovate further. Its main products were the Macintosh computer, iPod, and iTunes. The company generated $19 billion in annual sales in 2006. Apple then launched a cultural revolution called the iPhone and the trajectory of the company and the world as we knew it was forever changed. Over the past 13 years, Apple has sold billions of iPhones, invented remarkable products such as the Apple Watch, iPad, and AirPods, and improved quality of life through its Services offerings such as the App Store, Apple TV+, iCloud, Apple Pay, and so on. Since the iPhone debut in 2007, their stock is up over 2,700% and they now earn $60 billion a quarter! This incredible growth story is a result of relentless innovation, resilient adaptability, and prudent decision making. The political party in office had nothing to do with Apple’s success. If an investor sold Apple when Obama was elected based on the fear of increased corporate taxes, they would have missed out on a massive return. Yes, some political environments are easier and more profitable to operate in than in others, but ultimately, what makes a business profitable (or not profitable) is the actual business itself.
This is why we build your portfolio using a “bottom up” approach, meaning that the process of analyzing the fundamentals of businesses guides our investment decisions. We own good businesses for you now and we will continue to own good businesses after the election. We didn’t predict a pandemic and we can’t predict election results, but we do know that disruption always occurs, which is why we own durable, profitable businesses that will adapt and innovate through any economic cycle. The next few months may be volatile as the election tit-for-tat heats up and the media instills fear through headlines, but we firmly believe that staying invested in an allocation in-line with your risk tolerance is the best course of action. The chart below proves that investors who stay the course will be rewarded in the long-term.
Lastly, remember that our political system was deliberately designed with checks and balances in place to limit the authority held by one person. Both sides are out to make the other look as apocalyptic as possible in hopes of motivating their donors and voters. Policy changes will occur no matter the outcome, but nothing as radical as proposed on the campaign trail thanks the strategic separation of powers we have in place. One election does not make or break a nation. Before long, the 2022 mid-terms will come into focus and the presidential election in 2024, with the American people ready to cast their vote and make adjustments again and again.
