Politics and the stock market. What does that mean for your money? Should you be concerned heading into a Presidential election? We have been in the midst of a volatile political climate over the past few years, but should that political climate change the way you invest?
Election Year: Known or Unknown Entity
For the investing world, traditionally a known entity, or someone who has a policy track-record, has been more predictable. A Market Insider CNBC article from the morning of the 2016 election read, “Wallstreet has made it clear it favors Democrat Hillary Clinton over Republican Donald Trump.” The political side of this new president was unknown and untested. The markets should have been unfavorable and gone down. However, that wasn’t the case. There was a rally shortly after the election and markets have been up 35% since Nov 8, 2016. Trade deals and low interest rates have played a major part in the way the markets have responded to the policies of this president and congress. The markets didn’t do what Wallstreet thought they would do. Political climate didn’t correctly predict the stock market.
Political Party Investor Tendencies
In a study in Fall 2018, MIT Sloan School of Business (summarized by Bloomberg) researched “Do you invest differently based on what party is in power in the oval office or in congress?” As a category, republican investors have made more money than democrat investors since the election. Why is that? Republican investors were more confident after the election, with their party holding power in two branches of government, than democrats. Republicans went more bullish, or heavy in equities. Democrats went more defensive and generally invested in more bonds. This just confirms that despite Wallstreet predictions at the time of the election, no one could have known how the market and investors would respond to this specific political environment.
When it comes to managing our money, we need to be a-political. Don’t let your political views taint your view of your investments, especially when you are emotionally or passionately tied to a particular candidate, political party or election.
Historical Market Data and Ruling Parties
Historical stock market data shows that over the past 150 years, the stock market does better under a democratic president. However, all the way back to 1945, a republican controlled congress brings better markets. Ideally, we need both branches of government to pass laws so that we can have checks and balances in place. This is how bills like the Tax Payers Certainty & Disaster Tax Relief Act can move through congress and be signed into law. We can’t just look at who controls one piece of government and make assumptions about how the market will respond or perform. There are no definitive ways to know what truly may happen when one party controls a particular branch of government.
Time horizon, when you are going to need the money, should be the indicator of when or how to change your investments. Depending on when you need investments, you should be more conservative with your investments or riskier. If you need your money in the next few years, you should be more conservative. For younger investors, you have time to be riskier with market investments because even if we have a bear market, there should be a bull market to balance it out.
Bottom line – block out the noise of politics. Don’t let your political persuasion cloud your thinking of what we know in the long-haul works with investing. We just can’t guess markets in the short-term, only look at them in retrospect. There is no sure-fire way to predict how the market will respond to a political environment.
