President Biden’s withdrawal marked a new phase in America’s political saga. The decision sparked intense reactions from all corners of the political spectrum. Some expressed criticism, others conveyed gratitude, and many lamented yet another deviation from political normalcy. Investors were left to distill the news and determine the potential impact on markets.
An old investment adage tells us to “invest with our head, not over it.” Emotions are expected during volatile times, but they should never drive portfolio decisions. Countless studies demonstrate that emotions harm investment outcomes. To be fair, this principle is easier understood than applied when each headline seems scarier than the last.
Perspective is key when pursuing rational investment decisions. This can be achieved by revisiting history, assessing the present, and focusing on matters within your control.
Examining History
Decades of stock market data provide insight to investors. Perhaps the most surprising takeaway is the market’s relative ambivalence toward elections. Consider two key historical observations.
#1: There is no meaningful connection between election months and market returns.
Investors are inundated with portfolio ideas each election cycle. People are encouraged to invest in areas that might benefit from a candidate’s agenda and ditch holdings that might suffer from it. This age-old practice ignores an important reality. Returns during election months do not look much different than any other month in history.
The following chart from Dimensional Fund Advisors demonstrates this point. The chart shows the frequency of monthly returns for U.S. stocks from January 1926 to June 2020. The horizontal lines represent one month in this period. Blue and red lines are months when a presidential election was held, with the color denoting which party won. The dispersion suggests that election trades are guesswork at best.
#2: The stock market has risen steadily regardless of who holds office.
The same trend continues after an election. Nearly one-hundred years of U.S. stock market data shows steady growth regardless of which party holds office. The reasoning is simple. Presidential power does not guarantee policy change, and policy change is not the sole determinant of market performance.
The following chart from Dimensional Fund Advisors illustrates this point. Peaks and dips persist across nearly every presidential regime. These movements more likely reflect economic developments than the party holding office at a particular point in time. Consider a recent example that might surprise some. The US stock market averaged 16% per year under Obama and 16.3% per year under Trump.
Is this time different?
Dubious readers might say that we live in unprecedented times. These skeptics have a point. Inflation recently hit all-time highs, political polarization worsens every year, and new geopolitical conflicts seem to emerge each day. Social media contributes to this sentiment, as investors are more aware of these issues than ever before.
Our news cycle promotes an informed populous, but it does little to enhance investor decision making. Negative headlines lead to paralyzing uncertainty for many. It can therefore be helpful to review the topics that matter most. The following section isolates several focus points ahead of the 2024 election.[1]
1. Interest Rates
Interest rates dominate the economic conversation today. Encouraging inflation data suggest that the Federal Reserve might begin cutting interest rates this fall. This would likely bode well for both stocks and bonds.
The Federal Reserve is an independent body by nature. Its duty is to make decisions based on economic factors rather than political considerations. All else equal, inflation-related data will impact the future direction of interest rates far more than whoever wins office.
2. Energy
Energy policy is a major point of division between the two candidates. Policies enacted under Biden directed nearly $1 trillion toward clean energy initiatives. While Kamala Harris is expected to continue these policies, Trump has indicated a desire to reverse them. Still, intent should never be confused with certainty. Some observers question Trump’s willingness to pull green energy funding from the predominantly red states that are benefiting from it.
The market implications are uncertain. Investors may have already priced in Biden’s green energy initiatives. Conversely, any fossil fuel production gains under Trump could be offset by excess supply. Either bet is speculative at best.
3. Immigration
The candidates also hold different views on immigration. Trump’s public stance remains restrictive, while Harris maintains a more permissive posture. However, their private positions may prove far more nuanced. Both parties acknowledge that America’s visa system needs reform. They also both recognize that the labor market relies upon immigrant workers.
Immigration is another multi-faceted issue that continues to evolve over time. Any attempt to trade on preliminary immigration policy seems futile.
4. Taxes
Taxes remain front and center heading into the election. Top-of-mind is the Tax Cuts and Jobs Act of 2017. This sweeping reform reduced income and estate tax liabilities for millions. Both provisions expire at the end of 2025 under current law. Trump aims to extend these benefits, while Harris’ intentions remain to be seen. Many speculate that Harris will continue Biden’s pursuit toward higher taxes on corporations and the wealthy.
Taxes not only impact American pocketbooks, but the country’s deficit more broadly. Some fear our debt burden will jeopardize the country’s borrowing power and push interest rates upward over the long-term. Nevertheless, this is a bipartisan issue unlikely to be resolved by either candidate. Economists foresee further deficit growth under both election scenarios.
5. Trade
Presidents wield considerable authority over trade policy. Trump and Biden both used tariffs to build leverage, promote American business, and combat industrial competition abroad. This reflected a rise in protectionist ideologies and a departure from decades of globalist trade policy.
Studies suggest that tariffs slow global growth and increase inflation. Economists hope that both candidates recognize this reality and pursue accommodative trade policies in the next presidential term. In either event, investors seeking to profit from future trade policies are betting purely on conjecture. A volatile geopolitical outlook leaves much to speculation.
Control What You Can Control
Many voters have become disillusioned – and rightfully so. The last twenty years have seen a global financial collapse, a novel pandemic, several combative election cycles, and now a last-minute candidate change. While emotions are justified, investors should be cautious to separate fact from feeling. The sitting President is just one of countless variables impacting the economy. Long-term portfolio performance is never contingent upon one election cycle.
Investors should focus on what they can control. Smart tax planning, mindful diversification, and a disciplined investment approach are keys to a successful future. Sometimes the best strategy is the simple one.
[1] 2024 election analysis was inspired by a recent JP Morgan webinar titled The Investment Implications of the President’s Withdrawal.
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