The Election & Your Investments
By: David M. Foster, CFP®, CAP®
I’ve been having a lot of conversations recently with clients who are worried about what will happen to their investments in the weeks leading up to the election and the months or years after the election. These concerns usually come in three flavors:
- Will the market fall if Trump wins?
- Will the market fall if Biden wins?
- Will the market fall in the days and weeks around the election?
The short answer to all three of these questions is: maybe. However, that is always the answer to the question, “Will the market fall over (insert any time frame here)?”
Okay, all done here. You’re satisfied now, right? Oh, you’re not? Well, I guess I’d better elaborate further😊
But first, I would invite you to enjoy one of my all-time favorite musical artists with his take on the current situation.
That about sums it up, right?
Moving on, let's tackle these three questions in two parts. Up first:
Will the market fall if Trump/Biden wins?
In every election cycle you will see articles like these:
- This is what could happen to the stock market if Donald Trump wins.
- A Trump win would sink stocks. What about Clinton?
- Market Selloff After Obama's Re-election No Accident, Recession Coming
When you see headlines like these, it is helpful to consider the incentives of the company or organization that published it. Let's face it, you aren't going to click on an article with the headline, "Tens of Millions of Americans Earned Money and then Spent Some of it Today." That headline is both accurate and important, but it is also very boring, and most website's business models don't work with boring content.
These types of articles succeed in generating clicks, however, because we hate the idea that not only is the future unknowable, but in many cases we have limited or no control over how that future will take shape. As a result, we yearn for anyone to relieve us of the misery of uncertainty, and there are more than enough charlatans (and also well-meaning but misguided people) who are willing to oblige.
Of course, with even a brief moment of introspection, we all know that the future can't be predicted. But, when we are afraid, our lizard brains kick into overdrive and that moment of introspection doesn't come until it's too late, and we've worked ourselves into a frenzy, and we just want someone, anyone to make it stop!
The reality is that, although The President may have more influence than any other individual regarding what happens to the economy and the stock market (Jeff Bezos might dispute that), that influence is still infinitesimal compared to the collective importance of the other 7,799,999,999 people on planet Earth. The reason that investing in the stock market has been a good deal over the long run is that 5+ days a week, billions of people all around the world get out of bed, go to work, and try their best to make their lives just a little bit better than they were the day before.
Still don't believe me that The President has almost no influence on the long-term direction of the stock market? I invite you to take a look at these two charts (data courtesy of MacroTrends):
S&P 500 Performance During Democratic Administrations
S&P 500 Performance During Republican Administrations
Can you tell much of a difference there? With the exception of the Hoover and George W. Bush administrations (both of which began after a historical run-up in stock prices during their predecessor's administrations) I think the safest conclusion you can draw from these charts is that the stock market tends to go up.
Will the market fall in the days/weeks/months around the election?
Several weeks ago, I detailed some of my concerns regarding the election on this blog. You can go back and read it here, in its entirety. If you would like the short version, here it is: this election is likely to be a bit messy due to the increase in mail in ballots and the shortage of experienced poll workers. As a result, it's likely that we won't know who our next President is until many days or even weeks after election night. You might think that would tank the stock market, but, when we had similar uncertainty during the Bush/Gore election in 2000, the market only fell about 5%. That type of drop isn't uncommon (about once every 20 months), and, in this case, it probably had less to do with the election and a lot more to do with the bursting of the tech bubble and the recession that was only about three months away.
The Presidential election might be the thing that is top of mind right now, but the market can fall 5% or more for a whole host of reasons that have nothing to do with anything related to politics. Heck, earlier this year the S&P 500 fell by about a third in just over a month! You should always assume that the market is going to fall substantially, quickly, and without warning, which is why you should never have any money that you need to access soon in the stock market.
Putting It All Together
Investing in the stock market is really just a bet on the future of humanity. It's understandable that you might not be as keen on that future as you once were, but just think about all of the things we have overcome in the last 120 years or so: an influenza pandemic, two world wars, a global, decade long economic depression, the invention and proliferation of nuclear weapons, Kennedy's assassination, race riots/civil unrest, 9/11, etc. I could go on, but I think you get the point. Human progress is messy and uneven, but if you believe, as I do, that our progress will continue into the future, long after we're gone, then the only rational thing to do with your investments in response to an election cycle that occurs every 4 years is to have a long term plan, and don't let the short term derail it, no matter how scary the headlines might be.
Hi, I'm David Foster! I wrote this blog post, and I am also the founder of Gateway Wealth Management, LLC. I hope you found something valuable in what you just read. If you'd like to read more about me, click here. If you'd like to read more about my firm, click here. Thank you for reading!