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Features


RED VS BLUE: STAYING THE FINANCIAL COURSE DURING AN ELECTION

History shows economic uncertainty in presidential election years is often
unfounded, as the markets perform well, for the most part, no matter who wins.

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(Image credit: Getty Images)

By Bob Peterson, J.D.
published 4 weeks ago

As we enter another election season, politics will inevitably occupy a prominent
place in consumers’ minds. Presidential campaigns offer a wave of new policy
promises and agendas that look to address kitchen-table issues like jobs, taxes
and health care.



Presidential elections also feel incredibly consequential, as whoever wins
control of the White House will be in charge of the policy agenda for the next
four years. Consumers naturally speculate about how election outcomes and policy
proposals might affect their household budgets and investment portfolios.



But the truth is that the economy and the markets are much more indifferent to
presidential election outcomes than many people believe. Despite the
uncertainty, history shows us that investors don’t have to worry too much about
how an election result will affect their investments — and keeping this top of
mind will help them navigate economic waters during 2024.


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INVESTORS HAVE BEEN REWARDED REGARDLESS OF WHO WINS THE WHITE HOUSE

Conventional wisdom suggests one political party is inherently better or worse
for investors than another, but historically, stock returns have been strong
under both Democratic and Republican presidents. In looking at past returns
since 1932, Democratic presidents have seen stocks advance by 8.6% on average,
compared to an average of 6.6% under their Republican counterparts.

But these numbers don’t tell the full story. When removing outlier periods from
the averages — the boom years under Bill Clinton and the subsequent dot-com bust
and global financial crisis under George W. Bush — the difference in returns
between parties is practically zero, suggesting investors interpret historical
relationships with a healthy skepticism.





(Image credit: Courtesy of Bob Peterson)

Furthermore, the stock market has typically performed well during presidential
election years, in spite of all the uncertainty and media chatter. The S&P 500
has delivered positive annual returns in 20 out of 24 presidential election
years from 1932 through 2020. During the 24 presidential election years that
occurred in that 88-year period, the S&P 500 delivered an average of 10% annual
returns during an election year and on average continued to produce positive
returns for each of the three years following an election year.



(Image credit: Courtesy of Bob Peterson)


MARKETS LIKE CHECKS AND BALANCES

Contrary to popular belief, the economy and the stock market actually do better
when the White House and Congress are controlled by two different parties.
According to S&P data, stocks delivered an average of 12.9% annual returns from
1932 through 2023 when Republicans were in charge of both the White House and
Congress, and 9% during that time when Democrats were in power of both branches
of government.

However, when there has been a Democratic president and a Republican-controlled
Congress from 1932 through 2023, the S&P 500 delivered higher annual returns —
of 14%. And stocks have delivered average annual returns of 13.6% when there was
a Democratic president and control of the House of Representatives and Senate
were split.

In other words, political gridlock can actually be good for investors, because
it makes it harder to pass sweeping policy changes that could negatively affect
the economy.

In addition, the U.S. economy is big and resilient and is dominated by the
private sector, meaning the majority of economic activity is outside the direct
control of politicians.


ECONOMIC FUNDAMENTALS ARE WHAT REALLY MATTER

While it’s easy to attribute stock price action to one party’s politics, the
reality is more nuanced, and market performance is not so easily tied to
election cycles or political agendas. Political headlines may drive performance
narratives in the near term, but over the long term, returns are driven much
more by underlying fundamentals.

The path of monetary policy, the ebb-and-flow of the economy and the strength of
corporate earnings are all much more important factors than policy decisions
emanating from the White House. Ultimately, it’s the economic backdrop, not the
political party in control of the White House, that’s more relevant to
understanding why stocks go up or down.


KEY TAKEAWAYS

It's natural to be concerned about elections, but history suggests they have
minimal impact on portfolios and markets. In the long run, it’s a fool’s game to
try to predict how the U.S. economy and markets will respond to election cycles
or political outcomes. Instead, consumers should allow their long-term goals and
needs to guide their personal finances and investment portfolios.

One of the big advantages of working with a trusted financial adviser is that
they can help Americans keep a cool head among all the media and social media
chatter. An adviser can work with an individual or a family to create a budget
for meeting expenses and saving money over the long term, and also craft a
financial plan to save for college tuition and a financially secure retirement.

After these household budgets and financial plans are created, advisers can
serve as behavioral coaches to keep individuals and families focused on their
long-term goals and calm them down when they are considering financial decisions
based on what they are feeling and hearing in the run-up to Election Day in 2024
or in future presidential election years.

Data isn’t emotional. It doesn’t listen to the TV news or monitor social media.
And the data says the American economy and stock market are not drastically
affected by the outcome of presidential elections — and, in fact, all that
uncertainty can be much ado about nothing.


RELATED CONTENT

 * Four Historical Patterns in the Markets for Investors to Know
 * What’s the Difference Between Average and Actual Rate of Return?
 * To Make the Case for Equities in the Long Term, Look to the Past
 * Expecting a 12% Return on Your Portfolio? That’s Dangerous
 * Tax Plans of the 2024 Presidential Candidates

DISCLAIMER

This article was written by and presents the views of our contributing adviser,
not the Kiplinger editorial staff. You can check adviser records with the SEC or
with FINRA.



Bob Peterson, J.D.
Social Links Navigation
Senior Wealth Advisor, Crescent Grove Advisors

Bob is a Senior Wealth Advisor with Crescent Grove Advisors | Portfolio Advisory
Services. Specifically, Bob focuses on portfolio advisory services for clients
with liquid investable assets of $1 million to $10 million. In addition to
portfolio management, Bob works to coordinate his clients’ entire financial plan
to address tax planning, cash flow, retirement and risk management.



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