Every four years investors find themselves asking the same question: How will a new president affect my stock investments? It is often asked because of the uncertainty that a new president potentially brings to the economy and markets. Will he or she create an economy with tight or loose fiscal policies? Is he or she open to free trade, or adverse? Does he or she want to raise taxes or cut them? These are legitimate questions that can shape industries, the economy and our investments. Companies and consumers rely on a number of assumptions from the government about spending and taxes, and the theory is that any jolts to these assumptions from a change at the oval office could have adverse effects on the market.
While this theory may make intuitive sense, when we look at the data, we quickly realize that the markets do not care which party becomes president. As seen in the following graphs, market returns can vary greatly by four year cycle and the overall range of returns is similar in years with a Democratic president to those with a Republican president.
Why does this occur? Shouldn’t a pro-business party like the Grand Old Party be better for stocks? The simple answer is no. The reason the president does not affect markets more is because in many ways, the United States government was designed to limit power. On the campaign trail, candidates will make various promises regarding the economy, trade and taxes to attract votes. However, if they do make it to the White House, their plans and promises could fall on the deaf ears of congress or even be ruled unconstitutional by the Supreme Court.
Another reason why the stock market is not greatly affected by the president is because good companies with good leadership strive to create value regardless of who is in office. Laws and rules change, but the goal of a good business is not to fight change, but to adapt to it and grow regardless. The rules of the game may change, but the players do not. Corporate executives and entrepreneurs still look for ways for their businesses to win.
This data reinforces our ideas that a well-balanced and diversified portfolio will bring better returns in the long run. Rhetoric from the campaign trails may spook short term investors and cause short-term volatility. However, staying the course and sticking through the volatility is the key to bringing in good, consistent returns over the long term.
Source: Morningstar, Inc. Past performance is not indicative of future results. DJIA is the Down Jones Industrial Average, an index of 30 industrial companies. Indexes are unmanaged baskets of securities that investors cannot directly invest in; they do not reflect the deduction of advisory fees or other investment expenses.