Politics and Your Portfolio

You can’t possibly get away from the election.  While maybe that can be said during any election year, this year seems to be different.  There’s more.  Perhaps it’s due to the fact that we have two of the most unpopular candidates in history squaring off against each other.  Or maybe it’s the sensationalized coverage of the process that has caused this to look more like a reality TV show than an actual election meant to choose the most powerful person in the world.  What we do know for certain is that no matter your politics, this election has caused emotions to rise to the top; some from a political aspect, others from the perspective of just wanting this to be all over.  A few have even resorted to Googling the popular topic of “How to move to Canada.”

To give some perspective on the emotion we all feel about the election, we have to think about the history of the markets and election cycles.  Here are a few thoughts:

  • The markets choose certainty vs. uncertainty – The free market has a way of working to adjust to whatever rules are out there. However, to adjust to the rules, the rules need to be known.  This is why if you look over the course of history, the market favors a few things, at least in the short term:
    • Incumbent parties – Why is this? It’s because the rule of yesterday is more likely to be the rule of tomorrow.  It’s a known commodity.
    • Gridlock – The markets prefer to have a balance of power across the Presidency and Congress. This again leads to the idea of more stability in the rules than change.
  • Election years tend to be up – Over time, election years have been better than average. Some of this could be due to the idea that during election years, politicians only want positive things coming out which can keep a market going up.
  • Volatility tends to creep up as the election date approaches – Over time, it’s not uncommon to see a little bit of downward movement leading up to Election Day. Once Election Day passes, things are known with more certainty, typically causing the market to either stabilize or resume its positive ascent.

While all of this is true to be “typical” over the course of history, typical doesn’t mean too much.  Just because something typically happens doesn’t mean it always happens.  Furthermore, these points all tie to the short-term.  Even a year is short-term when you think about a true long-term market perspective.

What impacts your investment success far more is the long-term.  With that focus, you have to think about the economy and how companies are doing.  Growth, while slower in the U.S. than normal, is still positive.  Joblessness is down, wages are up, inflation is controlled and companies are still earning money.  We don’t think any of that changes in the short-term based upon what happens on November 8th.  Instead, we think all this leads to the idea that five to ten years from now, if you look at where the stock market is, it has a pretty great chance of being higher than it is today.  Will that come without some type of roller coaster ride?  No, it never does.  But throughout our history, no matter who has been in charge, the market has found a way to make it work.  You can see for yourself in the chart below.

political-chart
Chart above represents the growth of $1 invested in the S&P 500 Index from January 1926-June 2016. Source: Dimensional Fund Advisors

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market, this world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy.

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