By Brian D. Holmes, MS, CFP®, AIF®
It’s policy not party that matters
Historically, has the stock market fared better under Republican or Democrat administrations?
Many of us might instinctively answer Republican, based on the party’s traditional lower-tax, pro-business platform. In reality, however, there’s absolutely no statistical difference. Since 1945, a traditional 60/40 stock to bond portfolio has delivered a 6.0% average annual return with a Democrat president and a 6.1% average annual return under Republican administrations.1
It’s not the party in power that influences stock returns, but rather a host of other factors including where we are in the business cycle, the Fed’s monetary policy and current and projected corporate profits and valuations. Furthermore, given the steady march towards a globalized economy (with more than 50% of revenues for S&P 500® firms generated from overseas), the actions of any one government – even one as influential as the U.S. – has less and less of an impact than in decades past.
Yet it’s all too easy to allow party politics to color our investment decisions rather than focusing on what actually might help to shape the market’s future direction – the impact of policy. Whether November brings another term under a Trump administration or a new Biden presidency, it’s policy not party which will ultimately drive the economic train. It should be noted, however, that the Federal Reserve could choose to tighten its policy of low interest rate and unprecedented fiscal stimulus, regardless of who is in power.
Navigating a post-coronavirus election economy
Whoever’s the next Oval Office occupant, they will undoubtedly still be dealing with the economic, social and public health aftershocks of COVID-19. There’s still a great deal of uncertainty surrounding how soon everyday life (and our economy) will get back to some semblance of normalcy. And even when that does eventually come to pass, medical professionals have cautioned that periodic flareups of the virus (along with regionalized “shelter in place” orders) are likely to occur for the foreseeable future. Ultimately, the economic damage – especially across service businesses, travel and entertainment industries, commercial real estate and retail – will be extensive and long-lasting.
Given these unprecedented question marks hanging over the market, any prognostications must, by necessity, come with a tremendous caveat that we are swimming in unknown waters where past performance may be even less likely to indicate future returns. Nevertheless, we believe that the following three historical truths will continue to hold up in the aftermath of the November election:
- A division of power tends to be a good thing – in examining annualized returns for the two calendar years following every presidential election since 1952, the highest returns have occurred with a Democrat in the White House and either a Republican (15.8%) or split Congress (14.0%).2
- Boosted by a Trump re-election – three sectors in particular (defense, energy and financials) would likely enjoy a strong tailwind in the form of sustained high spending levels with continued low regulatory hurdles and controls.
- Benefitting from a Biden presidency – we would expect to see significantly increased spending to improve both healthcare and infrastructure, as well as a reduced headwind for large multinationals thanks to loosened trade sanctions and restrictions. Tax sensitive investing could also receive a boost.
Even in this time of unparalleled volatility and uncertainty, the best course of action is generally to stick with your carefully crafted long-term financial plan and trust that thoughtful diversification will enable you to weather the storm. Of course, you’ll want to periodically rebalance to ensure that market turmoil hasn’t significantly altered your overall allocation – resulting in either too little or too much risk. Aside from considering a few sector tilts, however, it’s best to leave party politics out of your investment portfolio.
The views expressed are not necessarily the opinion of Royal Alliance Associates, Inc and should not be construed directly or indirectly as a recommendation to buy or sell in any securities or industries mentioned herein. Securities offered through Royal Alliance Associates, Inc. member FINRA/SIPC. Investment advisory services offered through SIA, LLC. SIA, LLC is a subsidiary of SEIA, LLC., 2121 Avenue of the Stars, Suite 1600, Los Angeles, CA 90067, 310-712-2323, and its investment advisory services are offered independent of Royal Alliance Associates, Inc. Royal Alliance Associates, Inc. is separately owned and other entities and/or marketing names, products or services referenced here are independent of Royal Alliance Associates, Inc.