If you like hyperbole, this is the election year for you. Strong feelings abound on both sides of the political spectrum, and heated passions have spilled into many facets of society that are usually benign to politics.
In our office, we talk about politics almost every day with clients concerned about who might be our next president. It does not really matter whether they are liberal or conservative. The fears are the same.
“If Donald Trump wins, I’m pulling out the market,” some say. Others say they’ll make for the sidelines if Joe Biden becomes president. But jumping off an emotional ledge just because of an election is a serious mistake.
Political tides ebb and flow, and presidential administrations come and go, but markets continue to gain value over the long term and reacting to an election cycle is not a winning investment strategy. Successful investors stay focused on long-term goals and resist making short-term decisions based on politics.
We can look back at history and assess how markets have performed under various leadership configurations, such as a Democrat in the White House and a Congress split between the two parties. Historians have documented trends, but those trends are not necessarily predictors of future performance.
For example, look at the current configuration. The Dow Jones Industrial Average has an abysmal record when there has been a Republican in the White House and a Congress split between the two parties, averaging 1.1% in the first two years after the election, according to Fidelity Market Research. That is the worst performance of all possible configurations.
Historians might have advised investors to jump ship when the Republicans lost the U.S. House of Representatives in 2018, leaving President Trump to work with a split Congress. But those who ignored history are glad they did. The Dow gained nearly 6,000 points before the bottom fell out in February. Even with the coronavirus selloff, the index is still ahead of where it was in January 2018.
History can be intriguing to study, but election outcomes and future market performance do not necessarily align, so it’s easy to see why experienced investors don’t react to political outcomes. Instead, investors focus on interest rates, corporate tax rates and earnings.
For example, today’s markets are largely driven by a low 21% corporate tax rate and historically low interest rates.
The outcome of a presidential election would not necessarily change either of those variables. A Democratic president might attempt to raise the corporate tax rate, but it is safe to assume a Republican majority in the Senate would thwart that attempt. Even if Democrats take the Senate majority, a corporate tax hike could face strong opposition from Republicans and even some Democrats.
As for interest rates, the Federal Reserve has demonstrated a strong commitment to keeping rates low for the foreseeable future, and it’s important to remember that the Fed functions independently from the president.
There are many arguments and counterarguments about public policy from Washington, but the fact is our government is well-balanced, and it has functioned effectively for 244 years. As divided as society seems to be right now, the historic fundamentals of our government remain the same.
So, it is important for investors to set politics aside and remember that elections have short-term effects. Meanwhile, they will be investing through many different presidencies and Congresses, and despite all of the hyperbole out there right now, the best investors follow a long-term path to their financial goals and avoid drastic moves based on an emotional response to the political season.
Zac Reynolds is chief investment officer at Oklahoma City-based Full Sail Capital, and he is one of the firm’s founding principals.