Elections and Your Investments
There are still several months before the elections in November, and it already feels like we are in unchartered waters: the assassination attempt of a former president, a change at the top of the Democratic party ticket, and incredible sums of money being raised and spent.
We are hesitant to write about such things in such a fluid and dynamic election, but we know these events are on investors' minds and will impact markets worldwide, at least in the short term. We will do our best to provide some historical perspective and context for what it all means for the economy, the markets, and, most importantly, our client's investment portfolios.
“It’s never paid to bet against America.
We come through things, but it's not always a smooth ride.”
- Warren Buffett
Below are themes the stock and bond markets will watch from each candidate over the remainder of the year and into the next.
Economic Policy
This is one of the many known unknowns. How much rhetoric will get into economic policy, and what does it mean for the markets? If Republicans win control, the current tax policy is expected to continue (some of the current tax provisions are set to expire at the end of 2025), which would be good for consumption as tax rates would remain lower.
However, a significant increase in tariffs (taxes imposed on imported goods) would act as a tax to the consumer, thus lowering overall spending and hurting economic growth. The truth probably lies somewhere in the middle. The following chart illustrates that economic and market growth happens regardless of whether the government is Republican, Democrat, or divided.
Going back to 1947, Republicans controlled the government 10% of the time and averaged 2.8% GDP growth. Democrats have had control 29% of the time and had 4.0% GDP growth. While some of this could be policy, most are based on the economy's fundamentals when a party controls the government.
Stock Market Returns
What about stock market returns for investors? Is there a noticeable difference between returns when one party controls the government? Once again, in the short run, there may be some impact on stock market returns, but in the long term, the below chart of calendar year returns shows the stock market (S&P 500) has returned 12.9 % under Republicans and 9.3% under Democrats.
Two observations on this data:
1) It is the calendar year returns. If we were to look at rolling period returns or the entire term of each administration, the returns would be different.
2) If we overlay the two charts, we see that economic growth and market returns often differ. No one party or one president drives the stock market – American Capitalism does
Investing Through our Personal Biases
In our politically polarized world, it should come as no surprise that when people are asked how they feel about the economy, known as consumer confidence, it often depends on what party they associate with and who is in office. During the Bush years from 2000 to 2008, Republicans felt much better about the economy. During the Obama years from 2008 to 2016, Democrats felt much better about the economy. As expected, that has continued and become even more pronounced since 2016.
So, what does this mean for your investments? Our job at Charter Oak is to provide you with a long-term perspective and focus on your long-term financial goals. We know we need to rise above the noise and invest long-term. Investing based on party affiliation can significantly impact your overall wealth.
The following chart illustrates a $1,000 investment made 70 years ago and invested in all periods is now worth over $1.5 million! If you only invested based on your party affiliation, you missed the compounding effect of growing wealth.
While we do not know the future, we want to provide that long-term perspective and ensure we invest for our clients based on their goals. To paraphrase Warren Buffett, we may not be perfect, but we figure it out.
Finally, with mixed emotions, we announce that Charter Oak team member Sue Grant entered retirement in July, capping off a long and successful career in financial services client support. We are grateful for Sue and all she contributed during her time with Charter Oak, and wish her much happiness in retirement.
At Charter Oak, it is our pleasure and privilege to serve our clients and provide objective and positive guidance as we enter a very uncertain election cycle. We hope you make the most of these remaining weeks of summer as the calendar moves toward fall.