Politics & Investing: Perceptions & Reality

Politics & Investing: Perceptions & Reality

As a financial advisor, many com­monly believe I deal with technical or mathematical issues around financial planning, investing, and taxes. While that is true, dealing with the emotional mat­ters that surround money is often just as important as and, in many cases, more important than the technical. Every four years, presidential elections bring emo­tions to the forefront for many.

Perceptions or Reality?

In aggregate, we collectively live in the same country with the same economic and income growth and employment rates. There are no alternative facts, yet perceptions on the economy swing wild­ly, at least in part due to political beliefs.

According to a Pew Research Poll in January 2020, before COVID-19 became omnipresent in the minds of Americans, 81% of Republicans said the economy was excellent or good. But that number was just 18% in November 2016, just before Trump’s victory.

By contrast, Democrats’ assessments of economic conditions had changed only modestly since before Trump took office. The same poll showed 39% of Democrats say conditions were excellent or good. In November 2016, 46% had a positive impression of the economy.

By this poll, you may argue Republicans are more fickle, transposing 18% to 81%, while Democrats are more pessimistic – never eclipsing the 50% glass-half-full line. Now that I’ve offended both sides, what I would argue is that perception may not be reality.

Investment Implications

A prudent investing process should be evidence-based and not emotionally or politically driven. Trying to outguess the market – especially for shorter-term price movements – is, at best, a game of chance and likely to cause you to lose money. Current stock market prices include the aggregate expectations of market participants, including expecta­tions about the outcome and impact of elections.

In our 24/7 news media culture, there is no shortage of polls or prerogatives on who will win the election or whether the economy will do better under Trump or Biden. This information is already fac­tored into stock market prices.

Surprises relative to current expecta­tions may trigger price changes in the future. It is not the first-order prediction of whether Trump or Biden will win that matters. It is the second order of what policy ultimately passes and the third order of how companies will respond to the change. Oh, yes, then there’s how all of this is interpreted and invested upon by market participants.

Unless you have a reliable crystal ball, you cannot predict how the election will impact the economy, let alone stock prices (Reminder: the economy and the market are not the same, and the two may diverge.)

Long term, results show the market has provided substantial returns regard­less of who controlled the executive branch. While returns have been better under Democratic presidents, there is no conclusive statistical evidence that the president’s party has an impact on stock market returns. The market is a complex and adaptive system where cause and effect are not easy to link.

Stock markets can help you grow your wealth, but investing is a long-term endeavor. Making investment decisions based upon the outcome of presidential elections is unwise, and this election cycle is no different. At best, any positive outcome will likely be the result of ran­dom luck. At worst, it can lead to costly mistakes. Accordingly, there is a strong case for investors to rely on discipline and process rather than trying to outguess the market.

I would never ask you to abandon your political beliefs. But for the sake of your financial future, all I ask is you keep your politics separate from your investing.