Politics and Your Portfolio
Quick Take
It’s understandable for investors to be concerned with how the stock market will perform in a U.S. presidential election year.
Historical market data suggests that it doesn’t matter which political party resides in the Oval Office.
Policy agendas and enactments don’t always translate accordingly to the financial markets as one might expect. The economy and corporate profitability matter more than politics at any moment.
U.S. presidential primary season is well underway, and November’s general election will be here before we know it. We are already inundated with election ads and information, whether that’s on social media or Saturday Night Live. Much can happen between now and then, but odds markets speculate a repeat of the last presidential clash.
It’s common for investors to be concerned with the impact of the presidential election cycle on financial markets. We believe it’s important to maintain perspective as November approaches, and we brace for this election cycle.
What the Data Says
Who is in the White House matters very little to the stock market. Studies of historical market performance suggest it doesn’t matter if a Republican or Democrat controls the Presidency.
The most often cited paper published in the Journal of Finance in 2003 is “The Presidential Puzzle: Political Cycles and the Stock Market” by Pedro Santa-Clara and Rossen Valkanov. These authors attribute higher returns under Democratic regimes compared to Republicans, finding stock returns are 9% higher under Democratic administrations.
However, the paper didn’t account for stock market volatility. In 2004, two Federal Reserve economists published a paper refining this study and found a much smaller margin between Democratic and Republican administrations. So much so, they determined there was no discernable impact between the two.
Policy and Performance
Policy agendas and enactments may not translate accordingly to the financial markets. Certain policies may never make it through the choppy waters of Congress, or the intended effect may not play out in the economy.
The Biden administration campaigned on promoting renewable energy and reducing fossil fuel consumption. Indeed, the Inflation Reduction Act of 2022 committed a historic amount to climate. But so far during the Biden administration’s tenure in the Oval Office, the S&P Global Clean Energy index is down 55%, while the S&P 500 Energy index is up 115%.
The Trump administration campaigned and governed on just the opposite agenda (more fossil fuels, less renewables). During his presidency, the S&P 500 Energy index was down -30%, and the S&P Global Clean Energy index was up 306%.
Many other forces aside from policy agendas and legislation are at work in financial markets. Performance is better dictated by fundamentals and the underlying economic environment.
Politics Matters Less Than You Think
Over time and through Presidential regimes, stocks have managed to deal with periods of high taxes, low taxes, and changing regulatory environments. What has mattered more than the political environment is economic growth and profitability.
There have been considerable swings in stocks along the way, some perhaps even attributable to government policy, but the business cycle and the outlook for profits matter much more.
What It All Means
Elections are emotional and impassioned. The 2024 election will be no different. It will likely fuel anxiety, anger, frustration, and at times, apathy. The market could become volatile as this contentious election nears and further exacerbate these emotions. But our emotions can get in the way of managing money.
The economy and corporate profitability are much more important than politics. It has been true in the past and is still true today. Though it’s impossible to ignore the upcoming election, it may be best for your portfolio if you do.
Contact us at 865-584-1850 or info@proffittgoodson.com
1 https://www.jstor.org/stable/3648176
2 https://www.federalreserve.gov/pubs/feds/2004/200469/200469pap.pdf
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