Election 2020: What Happens to Stocks If the Other Side Wins?

Every four years at around this time, the wealth advisors at Clayton Wealth Partners increasingly field some version of this question during client meetings: What happens if the other side wins?

It’s understandable. Politics are deeply personal to many. Some are concerned about a potential political agenda from someone with different values and views. This worry can extend to thoughts about the economy, the financial markets, and their investments.

Donkeys, Elephants … and Bulls

We’ve got good news on this front for just about everyone.

Historically, U.S. stocks have rewarded investors over time when both Democrats and Republicans have been in the White House. Figure 1 shows the progression of the S&P 500 over the years, overlaid by the then-current U.S. president.

The presidents have governed with vastly different agendas and through different tax regimes, backdrops of war vs. peace, etc. One constant is that the path of least resistance for the stock market is up, driven in part by growth in the economy, corporate profits, and modest inflation.

Figure 1: Growth of a Dollar Invested in the S&P 500: January 1926–December 2019

Source: Standard & Poor’s, Dimensional Fund Advisors, Clayton Wealth Partners (CWP).

In our opinion, the president—whoever it is at any given time—receives too much credit when things are good and too much blame when things are bad. So many other powerful forces influence the domestic economy and financial markets:

  • Checks and balances of the legislative and judicial branches of the federal government
  • Monetary policy set by the Fed
  • Current asset valuations
  • Consumer and business confidence
  • Globalization and other international matters
  • Technological advancements

Political Allies, Political Opponents … and Bulls

While the president, as part of the executive branch, is tasked with carrying out and enforcing laws, it’s the legislative branch—namely Congress—that’s responsible for making them. Congress is responsible for controlling tax and fiscal spending policies.

So, what happens to stocks when Congress is controlled by Democrats or Republicans? Or if Congress is controlled by the president’s party? Or by the opposite party? Or if Congress is split?

Good news here, too.

Figure 2 highlights average annual market returns during every combination of partisan control (i.e., which party has won the White House and each chamber of Congress) from the post-Depression era through the most recent midterm election.

To date, the S&P 500 has generated positive returns over time for every combination of party division in the White House and Congress. Said differently, there is no composition of government that has resulted in stock market losses over its tenure.

Figure 2: Partisan Control, Average Annual S&P 500 Performance

Source: Strategas, Fidelity Investments, CWP.

Keep Your Political and Investing Decisions Separate

At Clayton Wealth Partners, we evaluate meaningful policy changes within a greater context. However, we have no trigger to automatically adjust portfolios based solely on anticipated or actual election results.

Economic, corporate, and market fundamentals inform our investing decisions. In our opinion, they have greater influence than party politics on long-term investment success.

 

 

James Walden, CFA

As a partner and the firm’s Chief Investment Officer, James Walden strives to maximize our clients’ long-term, risk-adjusted portfolio returns. This includes determining strategic and tactical asset allocations, as well as specific investment analysis and prudent rebalancing. Jim is also a partner and management team member. His expertise includes advanced investment research and valuation, and he is passionate about his role in helping clients reach and exceed their financial goals.