Welcome to the November edition of Top of Mind!
Election season can be a dangerous time for investors. It’s not that markets inherently perform poorly – in fact, the stock market tends to rise in election years! Instead, the risk lies in the emotionally charged atmosphere, which can cloud judgment and lead to costly mistakes.
This month, we cut through the noise of Washington to deliver five crucial points to guide you through this election season with both your portfolio and your peace of mind intact.
1. Markets vs. Washington: Remember, you’re invested in the market, not in Washington. The market is made up of businesses, which have one overriding goal: to make money for shareholders, regardless of who holds office. Legendary investor Warren Buffett said it well:
2. The True Market Driver: Washington is not the most significant factor driving the stock market. Over the long run, what truly matters for stocks is corporate profits, as made evident in this chart:
3. Partisanship vs. Performance: Voters may be partisan, but markets are not. The stock market has performed well under both Democrat and Republican administrations, which should not be surprising considering point number one.
4. Cause and Effect: Contrary to belief, election outcomes don’t predict what happens in the stock market. Rather, stock market performance tends to influence election outcomes. Investors often reverse the cause and effect. When markets perform well ahead of the election, usually in response to a strong economy, the incumbent party often wins.
5. Industry Level Impacts: Politics is more palpable at the industry level. While elections may not dramatically sway the overall market, a President’s regulatory agenda can impact industry performance. The following is a list of industry effects that Strategas Research, Baird’s investment strategy group, expects next year:
Even so, industry level predictions are difficult because broader economic trends often overshadow the impact of regulations. For example, energy stocks have outperformed the broader market during the Biden administration, but lagged the market during the Trump administration – contrary to what might be expected based on political platforms.
In summary, our five points lead us to this recommendation: Let’s make financial decisions based on your financial plan, not on unpredictable events in Washington.
What if We’re Wrong?
You may be thinking: “But what if this next election is different, and the market fallout is more substantial?” Fair enough: presidential policies can harm the economy and the stock market. However, democracies are self-correcting. Americans have the power to vote for change every four years. Thus, elections are not a good reason to sell stocks, which are typically held to meet long-term financial goals extending well past an election cycle.
Conclusion: Don’t Search Under the Streetlight
Intense investor interest in Washington brings to mind an old joke about looking for answers in the wrong places:
A policeman sees a man searching for something under a streetlight and asks what the man has lost. He says he lost his keys and they both look under the streetlight together. After a few minutes the policeman asks if he is sure he lost them here, and the man replies, no, and that he lost them in the park. The policeman asks why he is searching here, and the man replies, "this is where the light is".
Over the next year, the financial media will intensify its focus on the nation’s capital, suggesting to investors that, “This is where the answers are.” But that’s just not true. The next presidential election will undoubtedly impact the direction of the country, but if you’re looking for the key to the market outlook, look outside of Washington.
Thanks for reading this month’s Top of Mind! We hope you had a joyous Thanksgiving and that your holidays are off to a wonderful start. Should you have any questions relating to your finances as we approach year’s end, please don’t hesitate to get in touch. We’re here to help!
Warm regards,
Kurt, Cassidy, Ken, Teresa, Brian, and Jacque