The Election One Year Later: Are You Worried as an Investor? by Austin Crites, CFA
Update (11/03/2021)
Last year, many investors raised concerns over the stock market as we approached the election. While it is normal to experience fear over potential changes, we advised clients that history teaches us that markets are much more likely to be driven by the business cycle than a change in political leadership. The Trump administration lowered corporate taxes and reduced regulation (notably in the finance and energy sectors), but was largely critical of the technology and social media industries relative to the Obama administration. A shift to democratic power of the White House and Congress came with the potential to reverse course on some of those changes. However, as previously discussed, energy and financials underperformed the broader market (and especially big tech) due to macroeconomic factors that overwhelmed any actions taken by government entities. Let me provide an update more than a year later.
Despite some inflationary headwinds the economy and corporate profits have continued to grow. The S&P 500 (as of market close 11/02/2021) has increased in price by 20% since Biden’s inauguration despite the threat of higher corporate taxes and regulation. The energy and financial sectors have increased in value at a faster pace than the overall market despite calls for tougher regulation on carbon emissions and financial institutions. How could this be? Energy and financial stocks tend to be more sensitive to changes in economic activity than most, so as the economy has recovered and have resulted in higher commodity prices for energy stocks and lower default rates for lenders.
The reminder here is not that elections have zero impact on financial markets, but that they tend to be dwarfed by more impactful variables such as the effects of macroeconomics and the business cycle. In addition, some regulations can have impacts that may not be intuitive to most investors. For example, some energy company regulation may reduce drilling and be supportive of commodity prices benefiting energy stocks but harming companies that consume those commodities. This is why it is so important for investors to discern what variables will be most impactful to each investment being considered along with the ripples created downstream while trying not to focus too much on factors that have a lesser effect. Above all, we recommend separating political affiliation from the investment process and to always keep a long-term perspective.
09/08/2020
Historically, the stock market has mostly advanced regardless of who is President
Presidents have limited influence on stock market returns
Business cycles and other factors are more important to stock market returns than the President
We seek to invest in companies that can succeed regardless of the political environment
Figure 1 Chart depicts price return of the S&P 500 for the given dates each president was in office. Source: FactSet Research Systems
The Election
November 3rd is rapidly approaching. Does that make you nervous? You are not alone. Our office has fielded a lot of questions regarding the upcoming election and its outcome on investment portfolios. This blog is apolitical in nature. To the extent we delve into anything related to politics, it will involve specific policy actions as it pertains to our investments. So how much does the election matter to your investment portfolio?
While we all should go out and vote and be an active participant in our democracy, the truth is that presidents do not seem to have a big impact on the stock market. Why? There are roughly 330 million people in the United States and only 1 president. No matter who is in the oval office, 330 million people in the US will seek to improve their lives by however they measure it. The companies whose stocks comprise the stock market do not stop trying to increase profits based on who is president. Under most presidents, the market has advanced. Laws change, regulations change, and companies adapt with some winners and losers. The data clearly shows that stock market returns are more closely aligned to the business cycle rather than the president. In the above graph, economic recessions are shaded, and those periods tend to coincide with weak stock markets. Yes, presidents can have a minor impact on the business cycle, but they cannot control it entirely.
The Best and The Worst
The best years for the stock market in recent history were under Bill Clinton. However, stock market returns were built off a long economic expansion and the dot com bubble that proved to be unsustainable. In contrast, the younger Bush carries the title for the worst stock market returns in recent history. Just as Clinton should not get full credit for the abnormally high stock market returns of the late 90s, Bush should get some slack on the abysmal returns during his tenure. Bush was unlucky in starting just as the stock market bubble burst and finishing his second term at the depths of the financial crisis. They both had some influence in what happened, but as we know from helping our clients there is a lot more to life than the stock market.
Still not Convinced?
As investors, we often must battle the overconfidence bug. If you told me what kind of policy decisions transpired during the Trump presidency, it may be tempting to think the investing blueprint would be easy. Under Trump, the stock market returns have been typical, but an opportunistic investor might try to pick the best parts of the market given the policy agenda on offer. The Trump administration has prided itself on deregulation (especially for the energy sector and financial sector), tax cuts, and being tough on big tech (Obama is widely criticized for being too chummy with big tech). A smart investor may have decided to put all their money into banks and oil companies to take advantage. They probably would have sold their Amazon, Facebook and Google stocks since they could have reasonably assumed Trump would look less favorably upon them. That investor would have been dead wrong. Yes, all those things happened. But they were overpowered by other forces. Energy and Financials both underperformed the S&P returning (price only) -51% and 10% versus 58% for the S&P 500. In comparison, Amazon, Facebook and Google returned 337%, 138% and 115%. Why? Oil prices plummeted and interest rates declined which pressured the business models of banks, insurance companies and oil drillers while propping up the valuations of fast-growing companies. This is just the latest example of other factors overwhelming the impact made by POTUS.
In Conclusion
The election is important. Go vote and be an active participant in our democracy. However, a president’s actions are generally overwhelmed by other forces when it comes to stock market returns. One of the keys to being a successful investor is to focus on the issues that matter most to investment returns. Because we invest for the long term (more than 4 years), we focus our investment research on companies that can succeed no matter the political environment. Because we cannot predict politics, we seek to invest in companies that have competitive advantages that can endure all manner of political climates. One thing I can predict, half the country will be unhappy come November 4th.
Invest Curiously,
Austin Crites, CFA
Austin Crites is the Chief Investment Officer of Aurora Financial Strategies, a financial advisory firm based out of Kokomo, IN. He can be reached via email at austin@auroramgt.com. Investment Advisory Services are offered through BCGM Wealth Management, LLC, a SEC registered investment adviser. This blog does not constitute advice. This is not an offer to buy or sell securities. Advisor is not licensed in all states. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. BCGM Wealth Management, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. Clients may own positions in the securities discussed.
