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Putting Pennsylvania and Wall Street Into Perspective

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You may be wondering how President-Elect Joe Biden’s victory and impending presidential term may impact the financial markets. It’s a natural question, especially if you’re a long-term investor. But research does not bear out any meaningful correlation between a particular political party and good or bad stock markets.

It May Not Matter as Much as You Think

A recent article in Forbes indicates that Democratic presidents may actually have a slight edge, but it is far from clear that there is any cause-and-effect relationship between the party affiliation of the occupant of the White House and the performance of the markets. Indeed, given the immense complexity of the financial markets and the myriad of factors contributing to price performance, no single individual—even a US president—can make a verifiable claim to the ability to move markets one way or the other. The following chart bears this out. As you can see, since 1933, the overall trajectory of the equity markets has been upward, whether the sitting president favored red or blue.

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SOURCE: Dimensional Fund Advisors, “Growth of $100: Fama/French Total US Market Research Index, March 4, 1929–June 30, 2020.” Past performance is no guarantee of future results.

For example, $100 invested in the stock market upon the election of Richard Nixon on November 5, 1968, would have had a value of $84 when his presidency ended with his resignation on August 9, 1974. During the administration of this president, typically seen as pro-business, inflation averaged around 6% and the peak unemployment rate was 6.1%. This was also the era of “stagflation,” with rising inflation despite weakening economic output, both driven in part by the oil price shocks occurring during the period. The Reagan presidency, on the other hand, would have seen the value of $100 climb to around $285 during the period from November 4, 1980–November 8, 1988. This, despite a maximum unemployment rate of 10.8% and an average trade deficit of 32.4%.

On the Democratic side, the Clinton presidency, lasting from November 3, 1992–November 7, 2000, enjoyed the second-longest-running bull market in history (113 months), during which $100 would have grown to $386. During the Obama presidency, we saw the beginning of the longest bull market on record (131 months), though its total return lagged that of the Clinton presidency, with $100 growing to $266 during the period.

Elections can serve as an important lesson on the benefits of a long-term investment approach. As history demonstrates, attempting to “time the market” on the basis of perceptions of a presidential candidate’s likely influence on the markets would have resulted in missing out on much of the growth in the value of equities during the last ninety-one years. It’s also important to remember that market movements are based on all available information—not just the topics and events that are making headlines on a given day. So, even when the media implies that politics are the sole mover of markets, keep in mind that there is a lot more at play.

At Shone Wealth Management, we offer our clients solid, research-based investment advice, during election years and beyond. If you have questions or concerns about your investment portfolio, your financial plan, or other important matters, please talk to us. To learn more about how we can add value to your portfolio over time, read our recent article, “Understanding the True Value of Financial Advice.”

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