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Midterm elections are upon us. I’m here to warn you… don’t fall for the trap.
What trap am I referring to? It’s one I see investors fall for time and time again – letting politics determine their investment strategy.
Some of you are already sneering. I can feel it. And I understand. Politics is an emotional and divisive topic.
But I’ve observed something after working with thousands of investors across several administrations: Making an investment decision based on your political beliefs is a great way to lose money.
Presidential elections generate the most knee-jerk reactions.
“With (insert newly elected president) in charge, this country is going to hell in a handbasket! I’m selling my stocks.”
I’ve heard some variation of it more times than I can count. Republican. Democrat. It doesn’t matter. The trap has been sprung.
Don’t think midterms are immune. I’m already hearing grumblings. Massive Republican gains in Congress were widely expected earlier this year, but their prospects have dimmed. If you’re one to believe polls or odds makers (I prefer the later), Republicans are still largely expected to take control of the House, and more modestly favored in the Senate.
As an investor, I’ll always prefer to see political gridlock. I don’t want government getting in the way of my investments! When one party has too much power, it makes it easier for them to pass sweeping legislation. That has disruptive ramifications for publicly traded companies and their stocks.
The uncertainty of what could happen when one party has all the power looms over markets. Markets hate uncertainty! Balance between the executive and legislative branches of government are preferable for stocks.
This has certainly been the case when a Democrat is president. Even when you exclude the strong positive returns from 2020-2021, which I’m inclined to attribute to the unprecedented stimulus that was pumped into the economy. Take a look:
Dow Jones Industrials Average Annual % Change
Source: Stock Trader’s Almanac 2021 (Wiley). 1949-2019.
The market averaged 10.1% with a Democrat as president. But when you pair that with a Democratic Congress, that number drops to 7.4%. On the other hand, returns with a split or a Republican Congress are markedly better.
Come November, we’re almost certain to have a Republican or split Congress. Historically, those outcomes have not been bad!
The market has had positive averages under Republican presidents too, no matter what congressional combination you throw in. Simply put, the market tends to go up no matter who’s sitting in the White House or the Capitol building.
As much as they like to take credit when the stock market is doing well (or blame each other when it behaves badly), politicians don’t have as much power to impact the market as they’d like you to think. Invest accordingly.
Michael Joseph, CFA is a vice president and deputy chief investment officer at Stansberry Asset Management. He is a member of the CFA Institute’s Practice Analysis Working Body and sits on the board of the i.d.e.a. Museum Foundation and the advisory board of the Arizona Council on Economic Education. He can be contacted at [email protected].
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
