Volume 91 No. 9 - September 2020
Trump Portfolio Versus Biden Portfolio
“The question of questions now is whether the country continues on an emergency basis or whether it will return to the solid practices which over and over again have proved their sterling value as a means to a higher standard of living.” – The Investment Letter, June 1936
With the presidential elections near, emotions are running high as we speculate about who will lead the United States next year. These concerns are well-founded. The President of our country is our Chief of state, the head of our national government, Commander and Chief of the armed forces and ultimately responsible for executing and enforcing the laws that Congress creates. It’s only natural that many investors fear the worst should their favored candidate not win on Election Day.
Speculation, fear, and heightened emotions surrounding presidential elections are nothing new. Almost ninety years ago as the country struggled to emerge from the Great Depression, Investment Counsel anticipated the 1936 presidential election would be “one of the hardest fought and most momentous … [that] the new century has witnessed.” In the end, FDR won the election. The S&P finished up almost 30% that year even though he was perceived, at that time, as anti-business. Ironically, many historians now credit FDR with saving US capitalism.
What Does the Election Mean for Your Investments?
While the past will not always predict the future, we should review history to get guidance on what we might see from stocks following this year’s election. History suggests that while the results of presidential elections may influence social, foreign, and tax policy, past elections did not significantly impact investments for the long-term.
Investments and Elections
How have elections influenced stocks during election years? If we evaluate historic data, we see a mixed bag that suggests that the markets do not favor which party or candidate wins our presidential elections. Following President Trump’s election, the S&P 500 posted a 12% gain in 2016. That same index, following President Obama’s win in 2012, posted a 16% gain that year. After Obama’s first-term win, however, the S&P posted a 37% drop in 2008. Similarly, President George W. Bush’s election years saw an increase (11%) for the S&P 500 when he won a second term and a decrease (-9%) when he won his first term. Before that, every election year between 1944 and 1996 saw positive returns for the S&P 500, regardless of which party was in office.
When we explore deeper into the data and review the negative returns during the Bush and Obama terms, we can conclude that other factors influenced, or at least significantly contributed to, the S&P’s losses for those years. In 2008, the housing market crashed, leading the US into the Great Recession, and in 2000, the bursting of the dot-com bubble caused tech stocks to drop and the overall market to sag. Indeed, when we look deeper into the markets and their drivers, we see that the elections likely play a much lesser role than other events and economic conditions. When we review the data from the perspective of decades rather than single years, it becomes even clearer that although elections may contribute to near-term volatility, the markets are actually driven by economic cycles and corporate earnings.
Corporate Earnings are what Controls the Markets
No matter who sits in the Oval Office, stock prices will fluctuate and markets are volatile. While wars, pandemics, riots, oil shocks, and even elections will all bring short-term volatility and economic uncertainty, the good news is that stock prices generally increase over time, especially in a well-reasoned portfolio comprised of quality stocks.
Since 1970, the S&P has posted positive annual returns in 40 of those 50 years, or 80% of the time. While the media often speculate about and even predict our economic and financial apocalypse when we face any uncertainty, S&P 500 performance data shows positive performance across the last nine US presidents whether they were Democrat or Republican, one-term presidents or two.
The election of our country’s president is important to our nation and its future, but the markets appear to look more at the overall state of our economy. Heading into this election season, the US economy is far from normal. Unemployment is at historic highs, calls for social distancing remain in effect as the US and the world race to find a cure for COVID-19. The effects of the pandemic have leeched into every corner of our lives. In mid-August, CNN’s Back-to-Normal Index estimated that the US economy is operating at 78% of pre-pandemic levels.
Despite the economic turmoil brought on by COVID-19, the S&P 500 and the Nasdaq Composite both rose to record highs in late August, since their lows during the early days of this pandemic.
Even with the pandemic and all the cataclysmic effects it has wrought upon our lives and society, we have seen strong performance from stocks this year, and those with strong, well-diversified portfolios can and often have realized returns even in this uncertain, highly volatile market.
It is human nature to fear the worst amidst a contentious presidential election during a pandemic, but we should gain comfort and even confidence in the strength of the US economy to weather a storm, even one of these proportions. Historically, when we see downward fluctuations, these movements tend to be followed by long-term uptrends and gains if we embrace patience and keep a calm mind.
Vote and Keep Invested
Even though elections may cause fear and uncertainty among some investors, our strategy at Investment Counsel is not influenced by who becomes president. Whoever sits in the oval office come late January 2021 has much less impact on your investments than the media would have you believe.
While monitoring economic factors, we structure our clients’ investments so they may have an opportunity to maximize gains by investing in high-quality securities meant for long-term growth. We do not attempt to predict the unpredictable, nor do we engage in high-risk trading based on who does or does not become president. Using this strategy, whether Donald Trump or Joe Biden prevails, you should remain confident in your investment strategy given historical trends and the strength of the US economy.
Investment Counsel Inc. is a registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.