Why you should keep politics out of investment decisions
Stock market moves over the next months will have no bearing on the final outcome
The year is 2020, and the world is entirely divided about who should occupy the White House from January. Well, not entirely ... one indomitable group is torn between their conscience and their personal financial interests: investors. Despite his many shortcomings, President Donald Trump is seen as a champion of the stock market. For him, it is the most reliable gauge of his own performance, and he acts accordingly.
Per the S&P 500 index, up 40% over the first three years of his reign, he was doing great. His corporate tax cuts in 2017 provided the early impetus. And when the market stalled in 2018 he broke one more taboo, openly pressurising the US Federal Reserve to lower rates. Eventually it did, feeding another rally and Trump’s sense of omnipotence.
US elections traditionally spark a forecast frenzy on how the outcome will affect the stock market. There was broad agreement this year that Joe Biden would get too distracted by the important issues of the day to nurture the S&P. He would raise corporate taxes, rein in big tech and big pharma, and refocus on environmental issues and renewable energy, both at the expense of oil.
This, however, assumed that Democrats would also gain control over the Senate, which is now all but ruled out, making it almost impossible to pass reforms. Such political paralysis frustrates legislators but suits investors, who want policy certainty. Four years ago investors were similarly concerned about a Trump presidency, and his “America First” anti-globalisation rhetoric.
But you can’t keep the US markets down for long. They have become buoyant in recent years and have quickly refocused on the Biden positives: the passing of a further relief bill, better handling of the pandemic, and an easing of the trade tensions with China and the EU. By the time Biden’s victory was confirmed the S&P 500 was already 7.5% off its pre-election low, another slap in the face for the incumbent.
The reality is that, in a variation of the ‘buy on the rumour, sell on the fact’ trading adage, the market is rigged against private investors
No-one knows how this will actually play out, so the forecast mill will keep turning. But who should care about these forecasts? Asset managers perhaps, looking to reposition their portfolios, and traders looking for a quick profit, but they should not matter to the target audience, the public. Not to long-term investors, because stock market moves over the coming weeks and months will have no bearing on their final outcome, and not to short-term investors, who have no place being in the stock market.
Nonetheless, investors react to these predictions. According to a recent UBS report quoted in Business Insider, 63% of US investors and businesses surveyed changed their portfolios ahead of the election. About 36% increased their allocation to cash, 30% adjusted their sector allocation and 27% added portfolio protection of some kind. A quarter said they would reduce stocks on a Biden win, while 29% said they would increase stocks on a Trump win.
The reality is that, in a variation of the “buy on the rumour, sell on the fact” trading adage, the market is rigged against private investors. Forecasts about the outcome of specific events are always likely to be wrong because they are already discounted. Rather than improve investor returns, they just encourage harmful behaviour, such as market timing and straying from a mapped-out path.
The message should rather be that in the long term the market’s “weighing machine” — which measures the performance of companies not politicians — prevails. Investors were handsomely rewarded over just about every presidential term over the last 80 years. One dollar invested in the S&P 500 index at its launch in January 1926 would be worth $10,000 by the end of 2019, a compound growth rate of more than 10% per annum.
This growth rate was not constant over all terms, but there is no meaningful correlation between stock market returns and the party affiliation of the president. Considering the many factors that influence this — notably prevailing valuations and the phase of the economic cycle before inauguration — it is folly to believe they can be bent to one person’s will.
If anything, control over the Congress seems to be a more significant factor. But just because markets have historically done better under a Republican Congress does not mean investors were better off holding cash under a Democrat one (they weren’t), or that this pattern will persist (no-one knows).
Faced with such an era-defining election there is an understandable urge to act, to pre-empt the outcome, as though this one issue alone will define the future. Yet Biden had barely finished talking up masks before the Pfizer vaccine announcement changed the headlines, and sentiment.
So rather than expend energy on who occupies the White House, Senate and Congress, and how the market will react, focus on what will really improve your investment outcome: a higher savings rate, a risk-appropriate asset mix and lower fees. And controlling your emotions, which in volatile times like these means sticking to a sensible plan and keeping your politics away from your portfolio.
• Townsend is business development manager at 10X Investments.
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