The 2020 U.S. presidential election has been a slog for just about everyone, no matter what your political orientation. Unfortunately, the tension is likely far from over – the outcome may not be determined for days, weeks or even months. Legal challenges are likely.
My advice to readers this week is to push back against the uncertainties of politics and to check your emotions at the door. Too often, I see investors conflate their political beliefs with their beliefs about economic outcomes – a very flawed approach, in my view. Feeling bad about the election outcome may lead to feeling bearish about the country’s economic future, which may lead to selling stocks for the wrong reasons. I think that’s a big mistake.
I included the data below in a previous column, but I’m sharing it with readers again as an important reminder that economics and markets have pushed higher no matter what the political balance of power. The reason, in my view, is simple: politicians aren’t the engine driving the U.S. economy forward – corporations and small businesses are.
The balance of power in government is constantly in flux, and we should reasonably expect it to remain that way indefinitely. But history tells us the stock market goes up regardless of how power is divided:
S&P 500 Average Annual Performance, 1933 – 2019
Source: Strategas2 Research. To note: the above returns exclude 2001-2002, as power in the Senate changed hands three times in that period.
Source: Strategas3 Research. To note: the above returns exclude 2001-2002, as power in the Senate changed hands three times in that period.
I could write pages and pages on how certain election outcomes might result in different possibilities for stimulus, tax policies, new regulations or deregulation, deficit spending, and on down the line. But sketching out hypotheticals would be feckless, in my view. Even if we did know the balance of power today, no policy directive is assured and a policy proposed often looks a lot different than policy enacted. Politicians have a long history of over-promising and under-delivering.
What’s more, the kinds of changes that matter most, like big adjustments to the tax code, often take years to complete. Back in 2017 when President Trump was inaugurated, the administration had “The Ryan Blueprint” for lowering corporate tax rates ready to go. It still took a year to push through the changes.
Ronald Reagan is another example. He focused much of his 1980 campaign against Jimmy Carter on tax reform, but his signature Tax Reform Act was not signed into law until 1986. Investors have time to plan for changes.
Bottom Line for Investors
In my view, the uncertainty of the moment should inspire investors to focus on decisions and strategies that have historically led to consistent outcomes. Long time readers probably know what I’m specifically referring to: the value of owning a diversified portfolio of stocks over long stretches (20+ years) of time. In a moment rife with uncertainty, I think you can hang your hat on the value of owning a diversified portfolio.
At the end of the day, in my view, the stock market responds far more to long-term earnings and economic growth trends – not to changes in political leadership. Investors all too often conflate political beliefs with economic outcomes, which I think is a mistake. I strongly believe investors can achieve better outcomes – and also feel better in general – by countering the uncertainties of politics with consistent investment strategies.