Captains Change, but the Ship Sails On


Jeffrey van Fossen, CFA, Managing Director, Portfolio Manager

Every four years, politics and finance converge as the U.S. chooses a presidential captain, and investors try to figure out what the outcome may mean for their pocketbooks and portfolios.

As in 2016, this November’s presidential contest is again steeped in extreme rhetoric, polarization, and emotion. And emotion is the real threat to your portfolio, not any one candidate’s platform (more on this below).

But while the inhabitant of the White House can indeed alter the lives of millions of people, history shows presidential politics have a surprisingly small impact on your portfolio. There’s absolutely no empirical evidence in the academic financial literature to suggest that the president, whether Republican or Democrat, should cause you to deviate from your investment strategy. The fact is, stocks generally rise over time no matter which party is in office.

As the chart shows, long-term investors who began investing in any election year have uniformly come out ahead, regardless of the winning party. After all, an investor’s time horizon is likely to be much longer than a four-year presidential term. Those who look beyond the headlines, focus on long-term goals and avoid trying to time the market have tended to reap the rewards in the long run. That’s true not just during elections, but any time of the year. The bottom line is that beliefs about which political party is best for the markets may encourage you to vote, but shouldn’t discourage you from continuing to pursue your long-term investment strategy, for several key reasons.

Source: Capital Group

Policy rhetoric will inevitably fall short in practice.

The genius of our American Republic is that its division into three branches of government creates checks and balances on the power to effectuate change. With few exceptions, it takes consensus to implement significant change, and separation of power makes this difficult, forcing consensus and compromise. Remember, the president is not a dictator. Just because he or she runs on a platform, doesn’t mean that agenda will be enacted. And even if the president gets what he or she wants, the real economy may not cooperate. It is for this reason that significant policy changes don’t typically come all at once, but in increments over years, sometimes decades. Only about 3% of bills are ever enacted during a president’s first year in office, and presidents typically can deliver legislatively on only about half of their campaign promises even when their party also controls the legislature. So, take the soaring pre-election rhetoric and doomsday headlines with a healthy grain of salt.

Consumers and businesses have a far greater impact on the economy than the government.

The overwhelming majority of what happens in the U.S. economy depends on the actions of consumers and businesses. Thus, long-term investment success has depended more on the strength of the U.S. economy than on which party occupies the White House or controls the legislature during any four-year period. And the market has proven resilient to surprises and crises time and again.

The unsurprising corollary of this is that the state of the economy greatly influences who is elected president, not the president determining the state of the economy. Decades of history prove that a strong economy results in a win for the incumbent party candidate. Indeed, going back to 1964, if the misery index, which is comprised of the seasonally adjusted unemployment rate plus the annual inflation rate, is down in the last year of an incumbent’s term, without exception the incumbent has been reelected.

The real threat to portfolios: Emotion.

This presidential election is generating especially strong emotion, and this may lead investors to be tempted to try to time the market or make other reactionary short-term investment decisions that are likely to negatively impact their longer-term investment returns.

The newly elected White House occupant will affect your investments only to the degree you fail to follow through with your established plan. Avoid letting your or others’ emotions get the better of you, because when emotion takes center stage, critical thinking runs for the nearest exit. Stay disciplined and work with your Ancora team to manage your portfolio through the natural economic, market and political cycles within a framework that is customized to and consistent with your objectives, timeframe, and tolerance for risk.

To conclude, captains change, but the great American ship sails on. As Warren Buffett likes to say, don’t bet against the success of the United States. America makes mistakes, voters sometimes hand power to misguided politicians and the public sometimes succumbs to manias that turn into panics and crashes. But left to work, trade and invest, Americans unleash their energies in productive fashion. Stocks fluctuate, but over time they go up, often in years you least expect it.

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