Who Is Better for Investors: A Democratic or Republican President?
by Katie Bruno, CFP®, CDFA®, MIMFA
Financial Planner
With less than 30 days to the U.S. election, many investors are worried about the economic outcome of the presidential vote.
As an investor, how much does it matter to you if the next U.S. president is named Donald or Joe? Although politics impacts markets more than in the past, the answer is still: “probably not a lot.”
Today’s political news has become a much greater source of volatility for the markets. At times, just a tweet from the White House has been enough to send the markets into a frenzy.
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President Trump’s tenure as president has had an impact on markets—more so than most. The corporate tax cuts he introduced boosted corporate America and earnings, while trade tensions with China clouded the economic outlook. There have been periods of uncertainty for investors over the past two to three years, and most recently, COVID-19 has highlighted several economic challenges.
If you’re anxious about the markets in 2020, you are not alone. Presidential campaigns tend to magnify negative messages as the candidates draw attention to what they believe are the country’s problems. It is no wonder if you may start feeling a little pessimistic too.
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Here are three insights to keep in mind between now and election day:
1. Historically, no political party has been exclusively good or bad for the markets.
What matters more than one single party is the policies a president chooses to enact, and the impact those have on our country. As an example, President Trump's corporate-tax cut was seen as a positive by the markets, while his handling of foreign policy with China had the opposite effect. It is important to remember that the president is only one of many factors that can influence the market. Other influences may be stronger, such as interest rates, inflations, changes in policy, and wars.
There is a perception out there that a Biden win would be the least friendly outcome for the financial markets. As investors, we should focus on his policy agenda and its potential investment implications. If there is a Democratic sweep of Congress, U.S. stock prices will likely price in an increase in corporate tax rates. This could make international equities more attractive. On the other hand, if Republicans retain control of the Senate, tax reforms are unlikely to pass. But, as many foreign policy decisions are made by the president, we can still expect an improvement in international relations and markets. Again, it’s the policies that matter more than just party affiliation. Some markets and industries may emerge as relative losers, while others may not.
Chart 3 in this article from American Funds shows us that, throughout history, the party in power hasn’t made a meaningful difference to the stock market. Over the last 85 years, there have been seven Democratic and seven Republican presidents, and the general direction of the market has always been up. What matters more than the election results is staying invested through that time.
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2. Diversification matters.
When you diversify your portfolio, you invest into different assets (stocks, bonds, cash) and different asset classes (large, mid-size, small, international, real estate, etc.). It would be nice if there were go-to sectors that we could choose in every election year. However, investing is not that simple. Past performance in the market when a particular political party is in power does not mean the same results will occur the next time that party is in power. In the last 20 years, we have endured multiple natural disasters, geopolitical conflicts, and through it all, there was not a clear winner.
Page 14 of the JP Morgan Guides to the Market highlights which asset classes have performed best over the last 15 years. Diversifying makes you less dependent on the performance of any one asset class. A diversified portfolio can help your investments earnings over time regardless of who is in the White House.
3. Maintaining a long-term perspective is key.
It can be hard to think past the next year, especially because political conversations often conjure up strong emotions. On top of the election this year, we are also experiencing a difficult pandemic, a global recession, and civil unrest across our country. All of this contributes to market volatility. It may seem easier to withdraw investments to the sidelines and wait out the election to see what happens, but decisions like that are driven by emotions, not facts. History tells us pulling out is a mistake and that we should stay invested.
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The real winners in this election will likely be the investors who continue to maintain their portfolios and avoid the temptation to time the market. Morey & Quinn financial advisors can help you make decisions that align with your financial goals and values. When your investments are aligned with what’s meaningful to you, you are better positioned to ignore the noise and focus on the long-term.
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Any opinions are those of Katie Bruno CFP®, CDFA®, MIMFA, and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.
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